FUNDAMENTALS OF SUSTAINABILITY

ACCOUNTING (FSA) CREDENTIAL™

LEVEL I
STUDY GUIDE
I The need for sustainability
disclosure standards

II The sustainability information

ecosystem

III Understanding IFRS Sustainability

Disclosure Standards

IV Corporate and investor use:

going beyond disclosure
FSA CREDENTIAL LEVEL I STUDY GUIDE DISCLAIMER

DISCLAIMER

Among other critical knowledge, the FSA Credential equips candidates with a strong under-
standing of the International Sustainability Standards Board (ISSB), how the IFRS Sustainability
Disclosure Standards are designed and what the IFRS Sustainability Disclosure Standards
are designed to achieve. The concepts and information provided in this study guide empower
professionals to make informed decisions related to sustainability disclosure and the use of
investor-focused sustainability information. It does not, however, aim to equip candidates with
a comprehensive knowledge of all requirements detailed in the IFRS Sustainability Disclosure
Standards. The content within the FSA Credential study guides should not be considered technical
application guidance or interpretive guidance for the purpose of preparing sustainability-related
financial disclosure. All official technical and interpretive guidance for the IFRS Sustainability
Disclosure Standards can be found in the IFRS Sustainability Standards Navigator on ifrs.org.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 2

FSA CREDENTIAL LEVEL I STUDY GUIDE PREFACE

PREFACE

The Fundamentals of Sustainability Accounting (FSA) Credential® is useful for all professionals
who benefit from understanding the link between sustainability information and companies’ finan-
cial performance. The FSA Credential is designed to create a common language and establish a
baseline understanding of core concepts across capital markets so that companies, investors and
other capital markets stakeholders effectively communicate and work together.
The curriculum does not assume any baseline level of expertise in corporate disclosure,
accounting, finance or investment analysis. Candidates will likely encounter concepts they already
know and recognize in addition to concepts that are brand-new. The material seeks to present
content that is relevant across professional roles. For example, investors benefit from understand-
ing corporate performance management and reporting processes so they can better engage
with and evaluate portfolio companies; companies benefit from understanding how investors use
sustainability information in their investment decisions so that they can recognize how the sustain-
ability information communicated via disclosure can help or harm access to capital. The curriculum
does not elaborate on concepts that lack relevance across multiple roles. For instance, methods
for integrating sustainability information into the portfolio construction process may be highly rele-
vant to investor audiences but do not offer much use to a company evaluating how sustainability
information can improve management outcomes.
For the purposes of this curriculum, a few terms are used interchangeably. ‘Sustainability’ and
‘ESG’ are used interchangeably when referring to information about environmental, social and
corporate governance as well as operational governance matters. Chapter 7 discusses material-
ity in the context of sustainability disclosure, including the terms ‘impact materiality’ and ‘double
materiality.’ Outside of Chapter 7, the terms ‘material’ and ‘materiality’ when used alone refer
to investor-focused materiality, also referred to as financial materiality, denoting the concept of
materiality linked to the evaluation of a company’s financial position, financial performance and
prospects.
The rapid increase in the use of sustainability information in capital markets represents a
powerful opportunity to create financial value while contributing to a more sustainable world.
However, the full benefits of investor-focused sustainability disclosure can be realized only when
professionals across markets use a common language and foster a shared understanding.

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CONTENTS
PART 1: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1. Demand for Sustainability Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.1. What is sustainability?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.2. Growing investor demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.3. Demand within companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.4. Other institutions driving demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2. The Historical Basis for Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.1. The aftermath of the stock market crash of 1929. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2. D isclosure as the basis of regulatory reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.3. The road to standardized accounting procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3. Materiality: a guiding principle for required disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.1 A long-standing legacy of investor decision-making. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.2. General characteristics of materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.3. Materiality changes over time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.4. N uances throughout the disclosure ecosystem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4. The limitations of financial disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.1. F inancial information beyond financial statements: the use of non-GAAP. . . . . . . . . . . . . . . . . 36
4.2. The changing nature of market value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.3. The scope of financial reporting expands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.4. New tools for investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

5. Introduction to the sustainability information value chain and the role of data providers. . . . . . . . . . . 46
5.1. G rowth of the ecosystem: a maturing industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5.2. The role of data providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.3. Sustainability data’s unique challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6. The Role of Standards And Frameworks: From Fragmentation to
Cohesion in Sustainability Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
6.1. The role of standard-setters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
6.2. Formative standards and frameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.3. D istinguishing characteristics of sustainability disclosure guidance . . . . . . . . . . . . . . . . . . . . 57
6.4. C reating a coherent system for comprehensive reporting – simplification through consolidation.6 1
7. Materiality: going beyond investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
7.1. M ateriality applied to sustainability disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
7.2. M ateriality in the IFRS Sustainability Disclosure Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
7.3. Materiality in the GRI Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
7.4. M ateriality in the European Sustainability Reporting Standards . . . . . . . . . . . . . . . . . . . . . . . . 71
7.5. Process vs. outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
8. Sustainability disclosure across jurisdictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
8.1. The relationship between standard-setters and regulators. . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
8.2. The growing prevalence of regulatory disclosure guidance. . . . . . . . . . . . . . . . . . . . . . . . . . . 79
8.3. C ommon types of sustainability reporting rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
8.4. Types of guidance shaping global disclosure rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
8.5. The influence of corporate governance codes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
8.6. B alancing flexible implementation with usable information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Last Updated: December 2023 4

PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS . . . . . . . . . . . . . . . . . . . 90
9. What is useful sustainability-related financial information?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
9.1. The importance of standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
9.2. Sustainability: a unique context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
9.3. The goals of the International Sustainability Standards Board. . . . . . . . . . . . . . . . . . . . . . . . . 92
9.4. A dditional characteristics of the IFRS Sustainability Disclosure Standards . . . . . . . . . . . . . . . 95
9.5. The primary objective of the IFRS Sustainability Disclosure Standards. . . . . . . . . . . . . . . . . . . 97
10. The IFRS Sustainability Disclosure Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
10.1. Core content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
10.2. Conceptual foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
10.3. Determining what information to disclose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
11. Setting IFRS Sustainability Disclosure Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
11.1. The structure of the IFRS Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
11.2. D eveloping the first IFRS Sustainability Disclosure Standards . . . . . . . . . . . . . . . . . . . . . . . 118
11.3. Maintaining the SASB Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
11.4. The initial development of the TCFD Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
12. How companies disclose sustainability-related financial information . . . . . . . . . . . . . . . . . . . . . . . . . 127
12.1. Introduction to sample disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
12.2. Why do companies disclose investor-focused sustainability information?. . . . . . . . . . . . . . . 128
12.3. Where do companies disclose investor-focused sustainability information? . . . . . . . . . . . . 131
12.4. What investor-focused sustainability information are companies reporting?. . . . . . . . . . . . . 139
12.5. How is investor-focused sustainability information being disclosed? . . . . . . . . . . . . . . . . . . 146

PART IV: CORPORATE AND INVESTOR USE: GOING BEYOND DISCLOSURE . . . . . . . . . . . . . . . . . . . . 157
13. A closer look: investor demand for sustainability information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
13.1. A global call for enhanced disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
13.2. A shift in market paradigms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
13.3. Companies come to call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
14. Considerations for corporate use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
14.1. B usiness roles applicable to sustainability disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
14.2. Preparing for disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
14.3. Preparing quality data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
14.4. Reporting material sustainability data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
14.5. Managing sustainability performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
15. Considerations for investor use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
15.1. Overview of sustainability in investing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
15.2. A Spectrum of the use of sustainability information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
15.3. I nvestor application of cross-industry vs. industry-specific sustainability data. . . . . . . . . . . 199
15.4. The pre-investment stage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
15.5 Index construction and sector allocation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
15.6. Post-investment engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
15.7. Investor reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
15.8. Creating an effective framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
15.9. Data is the backbone. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222

PREPARING FOR THE EXAM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

CHECK YOUR UNDERSTANDING: CHAPTER EXPLANATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224

SAMPLE QUESTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

GLOSSARY OF KEY TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275

5
LEARNING OBJECTIVES
1 IDENTIFY the factors influencing investor use of sustainability information.

2 RECOGNIZE why financial accounting and disclosure have evolved to meet the
needs of global capital markets.

3 IDENTIFY how sustainability disclosure has evolved and why it is an important

component of general purpose financial reporting.

4 DISTINGUISH how ‘materiality’ is defined and used globally in the context of

reporting.

5 RECOGNIZE the relationship between standard setters and regulators, the

types of regulatory disclosure requirements and their implications for capital
markets.

6 RECOGNIZE the roles of the organizations that make up the sustainability

information value chain.

7 RECALL the inaugural goals of the ISSB and the characteristics of useful
sustainability-related financial information.

8 RECALL the core content, conceptual foundations and sources of guidance of

the IFRS Sustainability Disclosure Standards.

9 RECOGNIZE the ISSB’s standard-setting process, including the processes

originally used to develop the SASB Standards and TCFD Recommendations.

10 DISCERN the implications of the Sustainability Industry Classification System®

(SICS®).

11 DIFFERENTIATE how companies disclose sustainability-related financial

information.

12 IDENTIFY how investor demand for sustainability information shapes corporate

disclosure and performance management practices.

13 RECOGNIZE the cross-functional nature of preparing sustainability disclosures.

14 DISTINGUISH the stages of sustainability disclosure.

15 IDENTIFY the influence of board governance, internal controls, and third-party

assurance on the reliability of sustainability information.

16 RECOGNIZE the role of sustainability management in corporate strategy and

risk management.

17 IDENTIFY how sustainability information is used in public equities (active and

passive).

18 IDENTIFY how sustainability information is used in corporate fixed income.

19 IDENTIFY how sustainability information is used in private markets.

20 UNDERSTAND the challenges investors face in using sustainability information

and how those challenges impact the market. 6
FSA CREDENTIAL LEVEL I STUDY GUIDE EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

Today, thousands of companies around the world disclose sustainability information. Each
disclosure is the product of a complex system of workflows, involving dozens or even hundreds of
professionals with specific corporate, accounting, legal, environmental or other expertise. These
processes yield a wealth of information about a company’s approach to and ability to manage
sustainability-related risks and opportunities. For such a broad and diverse group of professionals
to communicate effectively on the right topics—not just with one another but also with the investors,
creditors and lenders whose capital helps fund their business—a common language is required.
For centuries, accounting has served as the ‘language of business.’ Like any language, it has
evolved—along with the world around it—to meet the needs of its users. Over time, languages
gain new words, inflections, and even grammatical constructions, while others fall into disuse.
Likewise, concepts new and old have regularly entered and disappeared from the accounting
lexicon—from the rise of double-entry bookkeeping in medieval Europe to the establishment of
decision-useful financial accounting standards in the 1970s.
In today’s rapidly changing world, companies face a unique set of challenges that call for the
accounting of new information and for a new set of standards to ensure that information is useful.
Large-scale issues such as population growth, resource constraints, urbanization, technological
innovation and climate change can and do have profound effects on business outcomes. As a
result, managers are incorporating sustainability information into their decision-making processes,
and investors are looking beyond traditional financial statements for a more complete picture
of how companies create value over the short, medium and long term. The language of busi-
ness is evolving yet again to meet this growing demand. However, sustainability initiatives have
struggled to effectively sharpen their focus on the factors most relevant to companies’ finan-
cial position, financial performance and prospects. Consequently, the market is faced with two
opposing challenges: first, there is often more than enough sustainability information available
from large companies, but it frequently lacks comparability, reliability and usefulness for investor
decision-making; and yet there is also not enough investor-grade information from companies to
be able to fully assess sustainability-related opportunities and risks.
Increasingly, a wide range of market participants, including companies, investors and their
respective advisors and solutions providers, recognize the need for a shared understanding of how
sustainability matters can either threaten or drive value. The International Sustainability Standards
Board (ISSB) addresses this need by developing global standards that help companies disclose
material sustainability information to investors. The IFRS Sustainability Disclosure Standards
(sometimes colloquially referred to as the ISSB Standards) facilitate the disclosure of sustainabil-
ity information that is comparable and decision-useful. In doing so, the Standards empower both

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FSA CREDENTIAL LEVEL I STUDY GUIDE EXECUTIVE SUMMARY

corporate and investor decision-making, risk management, strategy and communication.

Against the backdrop of today’s changing business landscape, practitioners in sustainability,
finance, operations and investing must understand how to identify, quantify and communicate
sustainability matters that affect financial performance. In the content that follows:

• Part I provides historical context for standardized accounting and disclosure and describes
the factors that have led to the uptake of sustainability information in capital markets;

• Part II explores the sustainability information ecosystem, clarifying the roles of key entities
and their relationships, and the factors that led to the creation of the ISSB;

• Part III introduces the IFRS Sustainability Disclosure Standards, discussing how they are
designed and what they are designed to achieve; and

• Part IV explores the ways companies and investors utilize material sustainability information.
In addition to equipping candidates with a common language, the FSA Credential Level I
curriculum is intended to help candidates understand and navigate the sustainability disclosure
ecosystem, and to make informed decisions to the benefit of their own professional development,
their organization, capital markets and society at large.

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PART I
THE NEED FOR SUSTAINABILITY
DISCLOSURE STANDARDS
In today’s capital markets, high demand for sustainability information is
driven by investors and companies alike as the advantages of sustainabil-
ity in investment and corporate performance management are realized in
practice and proved through scholarly research. However, it was not always
this way. The history of financial disclosure illuminates the core objectives,
defining developments and past limitations that underpin the need for stan-
dardized sustainability disclosure
Part I provides:
• an exploration of the drivers of demand for sustainability
information;
• an overview the history of financial disclosure;
• an introduction to the concept of materiality established
for investor-focused reporting; and
• a discussion of how financial disclosure meets and does not
meet the needs of companies and investors.
FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

DEMAND FOR
SUSTAINABILITY
INFORMATION
1
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:
1 IDENTIFY the factors influencing investor use of sustainability information.

16 RECOGNIZE the role of sustainability management in corporate strategy and

risk management.

1.1. WHAT IS SUSTAINABILITY?

Today, the term ‘sustainability’ commonly appears in corporate and investor vernacular,
though it can mean different things to different people. Perhaps the most widely accepted
meaning of the term originates from the pivotal 1987 Brundtland Report published by the World
Commission on Environment and Development. Titled Our Common Future, it states that ‘human-
ity has the ability to make development sustainable to ensure that it meets the needs of the
present without compromising the ability of future generations to meet their own needs.’1 Many
others have articulated the concept of sustainability for different purposes. A few examples are
listed below:
‘In a sustainable society, nature is not subject to systematically increasing: 1.
concentrations of substances extracted from the earth’s crust, 2. concentrations
of substances produced by society, 3. degradation by physical means, 4. and, in
that society, people are not subject to conditions that systemically undermine their
capacity to meet their needs.’
—The Natural Step Framework, first developed in 1989 by Karl-Henrik Robert
‘The possibility that human and other life will flourish on the planet forever.’
—John R. Ehrenfeld, academic and executive director of the International Society
for Industry Ecology
[A sustainable investment is] ‘an investment in an economic activity that contributes
to an environmental or social objective, provided that the investment does not signifi-
cantly harm any environmental or social objective and that the investee companies
follow good governance practices.’
—The European Commission, as stated in The Sustainable Finance Disclosure
Regulation

1 World Commission on Environment and Development, Our Common Future (Oxford: Oxford University Press, 1987), Part I, Section 3.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

No two interpretations are exactly alike. Their differences lie in the context within which
they were developed—each shaped by different societal, political, industrial and organizational
circumstances at different points in time. The Brundtland Report sought to define ‘sustainable
development’ to inform global policy in response to growing concern for the environmental and
social problems associated with a rising standard of living and the global population in the
1980s. The Natural Step Framework sought to define a ‘sustainable society’ to support orga-
nizational planning in the early 1990s. 2 John R. Ehrenfeld defined sustainability in the context
of industrial ecology in 2009.3 The European Commission defined ‘sustainable investing’ within
regulation that seeks to improve transparency among financial service providers in 2019.4
Though no single, universal interpretation of sustainability exists, one common directive
permeates them all: actions and decisions made today must not threaten our ability to function
and thrive in the future.
The FSA Credential focuses on sustainability information in the context of capital markets.
For the purpose of this curriculum, sustainability information (sometimes called sustainabil-
ity-related financial information or ESG information) is the information about companies’
environmental, social and governance matters that effect financial performance but are not
traditionally captured in financial reports—in other words, the sustainability-related information
needed to evaluate companies’ ability to function and thrive in the future.
One cannot ignore that within capital markets the increasing prevalence of the terms
‘sustainability’ and ‘ESG,’ with all their intended meanings, reflects mounting evidence of the
usefulness of some sustainability information for achieving business objectives. Companies
and investors have come to a shared realization that financial returns can be sustained only if
companies are well governed and the social and environmental assets underlying those returns
are not depleted. Far more than an exercise in altruism, sustainability constitutes a key focus
area of even the most financially motivated companies and investors.

1.2. GROWING INVESTOR DEMAND

Many institutional investors demand sustainability information to improve fundamental
performance, manage risk and volatility to protect against diminished returns and, in some
cases, achieve above-market returns. Other investors seek to improve environmental and social
investment outcomes with financial returns as an equivalent or a secondary consideration. A
robust body of independent research provides a compelling picture of the benefits of sustain-
ability information for achieving investors’ objectives.

1.2.1. IMPROVED INVESTMENT PERFORMANCE

Some research demonstrates that companies committed to sustainability outperform in stock
market performance—evidence that more sustainable companies can ‘adopt environmentally
and socially responsible practices without sacrificing shareholder wealth creation.’5 For exam-
ple, a controlled model developed by researchers at Harvard Business School predicted that

2 The Natural Step, ‘The Four System Conditions of a Sustainable Society,’ Accessed June 2023.
3 MIT Sloan Management Review, ‘Flourishing Forever, An interview with John R. Ehrenfeld,’ Reprint. No 51120. 14 July 2009.
4 European Commission, ‘Annexes to the Commission Delegated Regulation (EU),’ Annexes 1-4, 31 October 2022, p.1.
5 Robert G. Eccles, Ionnis Ioannou and George Serafeim, ‘The Impact of Corporate Sustainability on Organizational Processes and
Performance’ (working paper), Harvard Business School, 29 July 2013.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

an investment of US$1 made in 1993 in a value-weighted portfolio of a company performing well

in sustainability would have grown to US$22.6 by the end of 2010, while a control portfolio of
non-sustainability performers would have grown to only US$15.4 in the same time period (see
figures below).6 This finding suggests that sustainability information can support evaluation of
market value.
Various studies have found that ESG performance has also been linked to improved profit-
ability. Companies focused on sustainability have ‘reduced costs, improved worker productivity,
mitigated risk potential, and created revenue-generating opportunities.’7 Where sustainability
performance is directly linked to profitability, sustainability information supports analysis of
fundamental corporate performance.

Figures 1 and 2: Sustainability performance benefits on a value-weighted portfolio

Figure 1: Evolution of $1 invested in the stock market Figure 2: Evolution of $1 invested in the stock market
in value-weighted portfolios in equal-weighted portfolios
HIGH LOW HIGH LOW
25.00 15.00

20.00 12.00

15.00 9.00

10.00 6.00

5.00 3.00

0.00 0.00
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Robert G. Eccles, Ioannis Ioannou, and George Serafeim, “The Impact of Corporate Sustainability on Organiza-
tional Processes and Performance” (working paper), Harvard Business School, 29 July 2013

1.2.2. RISK MANAGEMENT

Research also demonstrates that sustainability information can be a strong signal for
price volatility. For example, one study found that companies with higher sustainability or ESG
ratings have lower price and earnings per share (EPS) volatility than those with low sustainabili-
ty-performance scores.8 Based on historical data, Bank of America Global Research found that
companies in the top quintile of ESG performance experienced the lowest volatility in earnings
per share in a subsequent five-year period. By contrast, ‘companies with the worst environmen-
tal, social and governance records averaged 92% volatility.’ Notably, the researchers found
that sustainability information was the only reliable signal for predicting EPS volatility, providing
better insight than traditional measures such as return on equity. Sustainability information can
be important to investors when assessing risk and the predictability of investment outcomes.

6 Eccles, Ioannou and Serafeim, ‘Impact of Corporate Sustainability on Organizational Processes and Performance.’
7 S&P Global Ratings, ‘The ESG Advantage: Exploring Links to Corporate Financial Performance,’ 8 April 2018.
8 Bank of America, ‘Equity Strategy Focus Point,’ 18 December 2016.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

Relatedly, sustainability information has been shown to help avoid major losses. The same
Bank of America Global Research study found that, if investors bought only stocks from compa-
nies with above-average ESG scores five years ahead of a company’s bankruptcy, they would
have avoided more than 90% of the bankruptcies that occurred in the S&P 500 from 2005 to
2015.9 Similarly, research indicates that poor sustainability performers have a higher likelihood
of experiencing major negative credit events.10 Investors in public companies increasingly rely
on sustainability information to support risk analysis, to identify signals of future volatility and
value declines and to protect portfolio value.
While these studies tend to focus on public equity for its availability and abundance of data,
it is important to acknowledge that investors in private companies also increasingly rely on
sustainability information. Many private equity investors recognize ESG investing as a means to
improve portfolio performance, mitigate risk and generate alpha.11 Robust public, academic and
scholarly research on the benefits of sustainability information in private markets is limited, in
part due to the less transparent nature of reported data and corporate value in private markets.
As with all research, one can find flaws in individual studies that identify the benefits of
sustainability to investors. However, the benefits of sustainability information are borne out when
looking across a large sample of research. A 2015 meta-analysis of more than 2,000 empirical
studies found that the majority of studies demonstrate a positive relationship between sustain-
ability performance and financial performance. In the sample, 90% of studies demonstrated a
non-negative relationship between sustainability and corporate financial performance. In other
words, a corporate focus on sustainability need not come at the expense of financial objectives.
Rather, it enhances companies’ abilities to achieve those objectives.
Part IV expands on the diverse range of investor use cases for sustainability data.

1.3. DEMAND WITHIN COMPANIES

The factors described above drive investor demand for sustainability information from
companies. Some leading companies also generate their own internal demand for this informa-
tion for similar reasons: sustainability data can help provide insight into financial performance
and contribute to success in the near, medium and long term.
Some studies suggest that most corporate executives today recognize the link between
sustainability information and business
success. According to a 2019 CEO study “About 12 years ago, several people
jointly conducted by the UN Global Compact thought sustainability would cost money
and Accenture, 94% of CEOs believe that and was nice to do. Now, 12 years later...
‘sustainability issues are important to the creating value for our society and planet
future success of their business’ and ‘recog- can go hand-in-hand with business
nize that sustainability can drive competitive successes.”
advantage.’ Moreover, 40% ‘are seeing busi-
ness value through revenue growth’ and — Feike Sijbesma, CEO of Royal DSM, 2019
are creating ‘genuine value’ through risk

9 Bank of America, ‘Equity Strategy Focus Point,’ p. 194.

10 Witold J. Henisz and James McGlinch, ‘ESG, Material Credit Events, and Credit Risk,’ Journal of Applied Corporate Finance 31, no. 2
(Spring 2019).
11 Bain & Company, Global Private Equity Report 2020, 2020.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

mitigation, cost reduction and competitive advantage gained through ‘new markets, products
and services, resource productivity and efficiency.’ 12
A company’s ESG performance can also impact its access to and cost of capital. In fact, in
2015 researchers from the University of Oxford evaluated 200 empirical ESG studies and found
that ‘90% of the studies on the cost of capital show that sound sustainability standards lower
the cost of capital for companies.’13
Independent of investor demand for sustainability information, companies increasingly seek
to generate better sustainability performance data and insights for internal use to directly inform
strategic decisions, drive financial performance and foster long-term success.

1.4. OTHER INSTITUTIONS DRIVING DEMAND

In addition to demand from investors and within companies, a number of organizations in the
broader business ecosystem shape the public dialogue and practices surrounding the produc-
tion and use of sustainability reporting.

1.4.1. PUBLIC POLICY AND REGULATION

Policy-based initiatives stimulate sustainability disclosure by enacting national recommen-
dations or requirements for publicly listed companies in order to foster more stable, sustainable
economies. For example, the European Commission released the Action Plan for Financial
Sustainable Growth, a sweeping, multifaceted policy directive that sets forth a comprehensive
strategy and action plan to ‘further connect finance with sustainability.’ The plan contains 10 key
initiatives distributed among three core categories: ‘reorienting capital flows towards a more
sustainable economy,’ ‘mainstreaming sustainability into risk management’ and ‘fostering trans-
parency and long-termism.’14
Individual nations have also taken up policy initiatives aimed at corporate sustainability
disclosure, including Australia,15 India,16 Japan,17 South Africa18 and the United Kingdom19.
In instances where jurisdictions adopt the Paris Climate Accord into local policy, global policy
efforts promote the disclosure and use of sustainability information at a country level.

1.4.2. INDUSTRY BODIES

Non-policy efforts also influence the use of sustainability information. For example, the
Sustainable Stock Exchanges (SSE) Initiative is focused on building the ‘capacity of stock
exchanges and securities market regulators to promote responsible investment in sustainable
development.’ It offers ‘a global platform for exploring how exchanges, in collaboration with

12 UN Global Compact and Accenture Strategy, The Decade to Deliver: A Call to Business Action, September 2019.
13 University of Oxford and Arabesque Partners, ‘From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial
Outperformance,’ March 2015.
14 European Commission, ‘Renewed Sustainable Finance Strategy and Implementation of the Action Plan on Financing Sustainable
Growth,’ 8 March 2018.
15 Corporations Act, 2001.
16 India Companies Act, Section 135.
17 Ministry of Economy, Trade and Industry, ‘Guidance for Integrated Disclosure and Company-Investor Dialogues for Collaborative
Value Creation.’
18 Johannesburg Stock Exchange, ‘Regulation,’ accessed November 2020.
19 FRC, ‘Future of Corporate Reporting,’ 8 October 2020.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

investors, companies, regulators, and policymakers and relevant international organizations,

can enhance performance on ESG issues and encourage sustainable investment, including the
financing of the UN Sustainable Development Goals.’ In large part due to the leadership of the
SSE, most stock exchanges provide guidance to listed companies delineating why and how to
report sustainability information.
Statements from various other industry bodies also contribute to growing demand for
sustainability information in the market. For example, Accountancy Europe’s ‘Interconnecting
Standard Setting for Corporate Reporting’ states: ‘Global challenges, such as climate change,
depletion of raw materials, biodiversity loss, access to resources, planetary limits, human rights
and social concerns are increasingly core issues for companies … The nature of risks and the
drivers of value for companies today mean that broader information about long-term strategy is
essential for resilient businesses and sustainable investment decisions.’20 Other industry orga-
nizations, including the Global Asset Owner Forum, 21 Global Financial Markets Association, 22
the Institute of International Finance, 23 the International Corporate Governance Network, 24 the
Network for Greening the Financial System25 and the Securities Industry and Financial Markets
Association, 26 have all published calls related to the benefits of reporting sustainability infor-
mation. Such coalitions and associations build mutual understanding of the impacts of ESG
information and reinforce the demand for quality sustainability disclosure from members.
Recognition of the relationship between social and environmental responsibility and financial
success has initiated a torrent of demand for sustainability information. Investors and business
professionals alike recognize the need for business reporting to evolve. Indeed, change within
the disclosure landscape is nothing new. Disclosure expectations have been continuously evolv-
ing for the past 100 years, as markets become more sophisticated and key players within the
ecosystem evaluate the usefulness of disclosure and refine its purpose. The benefits of sustain-
ability information for corporate and investor decision-making represent a natural continuation
of this evolution.

20 Accountancy Europe, ‘Interconnected Standard Setting for Corporate Reporting,’ December 2019.
21 Global Asset Owner Forum, ‘Summary of the Fifth Global Asset Owners’ Forum,’ 4 March 2019.
22 Global Financial Markets Association, ‘GFMA Letter on TEG EU Sustainable Taxonomy Report,’ March 2020.
23 Institute of International Finance, ‘Building a Global ESG Disclosure Framework: A Path Forward,’ 10 June 2020.
24 International Corporate Governance Network, ‘Letter to Corporate Leaders,’ 23 April 2020.
25 Network for Greening the Financial System, ‘First Comprehensive Report: A Call for Action Climate Change as a Source of Financial
Risk,’ April 2019.
26 Securities Industry and Financial Markets Association, ‘Sustainable Finance/ESG,’ accessed October 2020.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
1 IDENTIFY the factors influencing investor use of sustainability information.

16 RECOGNIZE the role of sustainability management in corporate strategy and

risk management.

? CHECK YOUR UNDERSTANDING

1. Why are investors demanding quality sustainability information?

2. What factors drive demand for quality sustainability information within companies?

3. B
 esides companies and their investors, what other institutions influence demand
for sustainability information?

JUMP TO ANSWERS

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

2
THE HISTORICAL
BASIS FOR
DISCLOSURE

LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:

2 RECOGNIZE why financial accounting and disclosure have evolved to meet the
needs of global capital markets.

Today, standardized financial reporting is a global norm. Companies consistently report

accurate and timely information to investors through well-established reporting channels, often
reinforced by legal requirements, creating the rich bedrock of financial information on which capi-
tal markets rely. Investors know they can rely on companies’ regularly reported income statements
and statements of cash flows, for example. However, comparable, consistent and reliable corpo-
rate disclosure did not always exist.

2.1. T
 HE AFTERMATH OF THE STOCK MARKET CRASH
OF 1929
In September 1929, the London Stock Exchange crashed after prominent fraud claims came
to light. The New York Stock Exchange crashed the following month, largely due to fraudulent
investment practices, declines in consumer demand, misguided economic policy and over-
extended credit, as well as other factors. These events led to the Great Depression. Virtually
every country around the world felt the effects of the Depression, marked by a wave of bank fail-
ures, record unemployment rates and declining income.27 Global gross domestic product (GDP)
fell by an estimated 15%,28 though the effect on individual countries varied greatly, with some
countries’ GDP falling by more than 30%.29 In comparison, worldwide GDP fell by less than 1%
from 2008 to 2009 during the Great Recession.30
In the UK and the US, the crash led to more than an 80% drop in market value by the end of
June 1932. The public reacted angrily, with most of the ire aimed at the financial industry, leading
to broad support for reform and regulation of the capital markets. During subsequent investigative
hearings, legislators uncovered evidence of many unethical and risky financial practices. Bankers
and companies failed to fully disclose information about the companies whose securities were
being offered for sale, creating widespread securities sales using false or misleading information.31

27 Richard H. Pells and Christina D. Romer, ‘Great Depression,’ Encyclopedia Britannica, 10 September 2020.
28 John A. Garraty, The Great Depression (1986), Chapter 1.
29 Pells and Romer, ‘Great Depression.’
30 Garraty, Great Depression.
31 Senate Banking and Currency Committee, Stock Exchange Practices (Fletcher Report), S. Rep. No. 73-1455 (1934).

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

The 1929 stock market crashes—and the shock waves they sent through global markets—provide
one of the most striking examples of how a lack of transparency can lead to disastrous consequences
and erode investor confidence. They also demonstrated the real-world impacts of market failures on
the lives of everyday people, including retirees who rely on pensions and retirement savings.32

2.2. D
 ISCLOSURE AS THE BASIS OF REGULATORY
REFORM
The following sequence of events in the US provides a useful case study for why corporate
disclosure became the target of regulatory reform around the world. Prior to the Great Depression,
in 1914 the US Supreme Court justice Louis D. Brandeis articulated the benefit of disclosure:
Publicity is justly commended as a remedy for social and industrial diseases. Sunlight
is said to be the best of disinfectants; electric light the most efficient policeman.33
In other words, public exposure and transparency are the key to monitoring the companies
and investors that collectively shape capital markets. Brandeis’s thinking significantly influenced
the regulatory reform that followed, including the establishment of the US Securities and Exchange
Commission (US SEC) in 1934. The mission of the US SEC is to protect investors; maintain fair,
orderly and efficient markets; and facilitate the flow of capital. Disclosure was at the heart of regu-
latory reform in the 1930s, building on previous sentiments of the benefit of transparency.
At the time, scholars saw mandatory
disclosure as a method to hold manage- CAVEAT EMPTOR
ment accountable to their shareholders and
to promote the public interest.34 They posited Prior to the formation of the US SEC,
that disclosure would advance the ability of US investors operated under the
the capital markets to efficiently price securi- principle of caveat emptor, which
ties.35 Supporters of reform also emphasized postulates that the buyer alone is
that disclosure, by nature, is about investors responsible for vetting the quality of a
making informed decisions, as it ‘is intended to security before purchase. The US SEC
reveal facts essential to a fair judgment upon did not supplant caveat emptor; it sup-
the security offered.’36 plemented the principle with the obli-
The legislative history of the formation gation for companies to disclose to the
of the US SEC demonstrates two important investing public. Investors were still free
purposes for the US SEC’s existence: to make poor investment decisions.
1. to protect investors; and
2. to influence corporate behavior.

32 Lynn E Turner, ‘Speech by SEC Staff: Quality, Transparency, Accountability,’ 26 April 2001.
33 Louis D Brandeis, Other People’s Money and How the Bankers Use It (1914; Harper Torchbooks, 1967), p. 62.
34 Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (1932; Harcourt, Brace & World), p. 310; and
Cynthia A. Williams, ‘The Securities and Exchange Commission and Corporate Social Transparency,’ Harvard Law Review 112, no.
1197 (1999): 1217.
35 Williams, ‘The Securities and Exchange Commission and Corporate Social Transparency,’ p. 1216.
36 Felix Frankfurter, ‘The Federal Securities Act: II,’ Fortune 7, no. 2 (August 1933): 53.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

The second point is sometimes overlooked as a guiding principle for disclosure. In a historical
analysis of the emergence of the US SEC, Professor Cynthia A. Williams explains:
Yet, following Brandeis, disclosure was not an end in itself nor meant solely to
protect investors, although investor protection was clearly a major goal … In the
spirit of Brandeis—who was specifically invoked—Congress hoped that disclosure
of this information would change the way business was conducted.37
Professor Marc I. Steinberg concludes that the US Congress’s intent regarding corporate
conduct has come to fruition: ‘There is little question that disclosure has had a substantial impact
on the normative conduct of corporations.’38 Supporting this claim, in the 1970s while proposing
corporate governance regulations, the US SEC acknowledged the positive effects of disclosure
on corporate behavior.39
The regulatory reforms catalyzed in the 1930s—built upon the seminal values of transpar-
ency, corporate governance and informed decision-making at the service of market efficiency and
price discovery—are reflected across global capital markets. Although the evolution of disclosure
requirements was unique to each country in the 20th century, the purpose for disclosure is largely
the same globally, particularly the goals of protecting investors and fostering sound markets.
For example, Japan’s Companies Act states that ‘the principal objective of the disclosure
requirements for a stock company under the Companies Act is to protect the interests of both cred-
itors and shareholders.’40 In the EU, national security regulation has two goals: ‘1) protection and
functionality of the market and 2) protection of investors and debtors.’41 The Hong Kong Securities
and Future Ordinance, in establishing the regulatory objectives for corporate disclosure, identifies
the purpose of protection for the investing public.42 In addition to their protective functions, some
jurisdictions also highlight the role of disclosure in preserving societal well-being. In a speech to
the New Zealand Bankers’ Association, the association’s deputy governor stated that disclosure
is ‘about avoiding the consequences of poor disclosure, building stakeholder confidence, making
informed decisions, and creating market efficiency in the service of scarce resource allocation
and public welfare.’43
However, aligning on the purpose of disclosure does not mean corporate reporting practices
changed overnight. Establishing common reporting practices to achieve this purpose required
the accounting profession to evolve.

2.3. T
 HE ROAD TO STANDARDIZED ACCOUNTING
PROCEDURES
As transparency and disclosure crystallized as cornerstones of the capital markets, the
accounting profession began a journey that would eventually result in the establishment of

37 Williams, ‘The Securities and Exchange Commission and Corporate Social Transparency,’ pp. 1233–34.
38 Marc I. Steinberg, Corporate Internal Affairs: A Corporate and Securities Law Perspective (Praeger, 1983), p. 29.
39 Sec. Ex. Act Rel. 15,384, 16 SEC Dock. 348, 350 (1978).
40 Japanese Institute of Certified Public Accountants, Disclosure in Japan Overview, 6th ed., 2010.
41 Penn Law: Legal Scholarship Repository, ‘Securities Regulation in Germany and the U.S.: Brief Introduction to the ‘History’ of
German and European Securities Regulation,’ 22 February 2016.
42 Securities and Future Ordinance (Cap. 571).
43 Geoff Bascand, ‘The Effect of Daylight: Disclosure and Market Discipline: A Speech Delivered to Members of the NZ Bankers’
Association in Auckland,’ 28 February 2018.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

generally accepted accounting principles (GAAP) aimed at improving the consistency and
comparability of financial reporting procedures.
Today, it can be easy to take for granted the fact that financial statements are prepared
similarly from company to company, producing information that allows for apples-to-apples
comparisons and with the integrity and reliability enabled by third-party audits. However, the
road to today’s robust and reliable systems of financial disclosure saw significant hurdles, which
were overcome through collaboration, innovative thinking and time. Indeed, it took decades after
the stock market crash of 1929 to establish the financial accounting system in use today.

2.3.1. D
 EFINING THE PURPOSE OF FINANCIAL INFORMATION: THE ROLE OF
HISTORICAL COST ACCOUNTING
Financial accounting was originally developed to record accurate information. In the 1930s,
best practices for preparing financial statements relied on historical cost accounting, which
measures an asset’s value as the actual cost paid for the asset at the time of purchase. Under this
accuracy-focused approach, the original nominal value is reported on the balance sheet even
if the value of the asset changes over time. Yet, even with some generally accepted practices,
financial statements were largely prepared according to the practices and preferences of major
accounting firms, contributing to fragmented disclosure at the industry and market levels.
In the 1940s, the American Institute of Accountants’ Committee on Accounting Procedure
(CAP), the part-time committee that first established GAAP in the US,44 was established to help
define what types of accounting practices were generally accepted in that era when multiple
accounting methods were in use and exceptions to historical cost accounting gained prominence.
In 1959, the part-time Accounting Principles Board (APB) succeeded the CAP. Before the full-time
Financial Accounting Standards Board (FASB) succeeded the APB, in 1973, the APB sponsored
research into problematic areas of accounting and issued recommendations for the improvement
of accounting standards and practices, often facing opposition from the SEC, which, favored
efforts to ‘narrow the areas of difference in accounting principles’ over departures from historical
cost accounting.45
During this time multiple accounting methods were recognized under GAAP and significant
debate ensued about whether GAAP should standardize one set of methods or allow for flexi-
bility and diversity of practice. On the one hand, non-standardized accounting practices cater
to the needs of more reporting companies, in that companies can disclose information in the
manner they feel best represents their business. On the other hand, the fragmentation that exists
in the absence of standardization reduces the usefulness of disclosed information in the market.
The higher the variation of disclosure for similar events and transaction, the less comparable and
decision-useful the information becomes to investors, creditors and lenders.

2.3.2. DECISION-USEFULNESS ADVANCES STANDARDIZATION EFFORTS

Once aligned on the need for standardization, the accounting profession then endeavored to
find common ground on the fundamental objective of financial statements. Debates about histor-
ical cost accounting versus other asset-valuation methods centered on the view that financial

44 American Institute of Accountants, Examination of Financial Statements, January 1936.

45 Stephen A. Zeff, ‘The Omnipresent Influence of the SEC in the Work of the Accounting Principles Board, 1959–1973,’ Journal of
Accounting and Public Policy 7, no. 3: pp. 254–63.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

accounting exists to accurately identify the value of assets, which, some argued, changes over
time.
In the 1960s, the accounting profession re-envisioned the purpose of financial statements by
introducing the concept of decision-usefulness in A Statement of Basic Accounting Theory. The
document defined ‘accounting’ as ‘the process of identifying, measuring, and communicating
economic information to permit informed judgments and decisions by users of the information.’46
This new focus on decision-usefulness shifted the emphasis of disclosure away from strict histor-
ical asset valuation and toward the decision-usefulness of reported information to the users of
disclosed information. Accounting measurements were recast to serve a specific purpose (to
inform decisions) rather than to perform a singular function (to provide accurate measurement).47
In other words, the accounting profession recognized the importance of providing forward-look-
ing information rather than just historical accuracy. The purpose of accounting definitively shifted,
and financial statements were now intended ‘to provide information which will be of assistance in
making economic decisions.’48
Coalescing around this redefined purpose for financial accounting helped the profession move
closer to standardization. Without a clear purpose, financial accounting practices would likely be
difficult to standardize. A standard-setter would not be able to apply a consistent framework for
making decisions and assessing trade-offs throughout standard-setting activities. (More detail on
standard-setting is in Part II.) The accounting profession thus aligned behind ‘a coherent theory
which effectively linked decision-usefulness to the information required to make investment deci-
sions: using discounted future cash flows as the most relevant attribute of assets and liabilities.’49

2.3.3. TOWARD INTERNATIONAL STANDARDIZATION

The establishment of a coherent theory of accounting marked a vital step toward standard-
ization. However, alignment on purpose and theory was not sufficient to address the global
fragmentation of accounting and disclosure practices in use.
For example, although accounting practices in Australia, Canada, New Zealand, the UK and
the US were similar in many ways, they differed in key areas. Accounting methods in Australia, New
Zealand and the UK uniquely allowed companies to revalue their property, plant and equipment
(PPE), including investment property, while other jurisdictions still required companies to adhere
to historical costs. Significant differences also existed among accounting practices of continen-
tal Europe and Japan, ‘where income taxation drove accounting practice, where reported profit
determined by law the dividend to be declared, and where financial results could be manipulated
by secret reserves.’50
Globally, two key developments in the 1970s established the financial accounting system as
it exists today. First, the International Accounting Standards Committee (IASC) was founded in 1973
to develop international accounting standards. The IASC began as a joint initiative
of national accounting bodies from Australia, Canada, France, Germany, Ireland, Japan,

46 American Accounting Association, A Statement of Basic Accounting Theory (Evanston, IL: AAA, 1996), p. 1.
47 Robert Sterling, ‘A Statement of Basic Accounting Theory: A Review Article,’ Journal of Accounting Research 5, no. 1: 95–112.
48 George J. Staubus, The Decision Usefulness Theory of Accounting: A Limited History (1961), p. 11.
49 Stephen A. Zeff, ‘The Objectives of Financial Reporting: A Historical Survey and Analysis,’ Accounting and Business Research 1, no.
4 (January 2013), accessed November 2020.
50 Stephen A. Zeff, ‘The Evolution of the IASC into the IASB, and the Challenges It Faces,’ Accounting Review 87, no. 3. (2012).

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

Mexico, the Netherlands, the UK and the US, though many other countries later joined. 51
The standardization effort started simply at first, with the intention to focus on ‘the policies and
principles that have been established in the more sophisticated markets around the world.’52 As the
IASC gained credibility and buy-in, it grew beyond the efforts of national accounting bodies and
in 2001 became the International Accounting Standards Board (IASB), an independent standard-
setting organization with robust governance and due process. Today, IASB oversees the develop-
ment of the International Financial Reporting Standards (IFRS Accounting Standards), the goal of
which is to ‘develop, in the public interest, a single set of high quality, understandable, enforceable
and globally accepted financial reporting standards based upon clearly articulated principles.’53
The IFRS Accounting Standards are required by public companies domiciled in more than
140 jurisdictions and can be used in other jurisdictions—including China, Japan and the US—
to meet all or some regulatory reporting requirements.
One month after the IASC was formed, the FASB was established in the US to resolve dissatis-
faction about the lack of widespread support for standardized accounting. The FASB emerged to
serve as an independent, full-time organization dedicated to the development of financial account-
ing standards. The FASB was thus recognized as the authoritative source of US GAAP.
When the FASB was founded, the American Institute of Certified Public Accountants (AICPA)
published a report to definitively align on the purpose of financial disclosure, based on the under-
lying belief that clear financial reporting objectives would support the establishment of financial
accounting standards. The report seconded and bolstered the decision-usefulness objective that
had emerged in the profession, with a strong emphasis on the importance of discounted future
cash flows for identifying decision-usefulness to investors. Interestingly, the report also stated that
the economic and social goals of business are equally important.54 The committee pointed to envi-
ronmental externalities, such as pollution, to illustrate that some corporate activities impose costs
on the rest of society. In addition to providing decision-useful information to investors, the report
determined that the objective of financial statements is ‘to report on those activities of the enterprise
affecting society which can be determined and described and measured and which are import-
ant to the role of the enterprise in its social environment.’55 As it turns out, sustainability-related
disclosures are not a radically new concept, and were even referenced in mainstream accounting
literature in the early 1970s.
Over the course of several decades, global accounting standards organizations achieved
global principles-level alignment and standardization for financial disclosure. Notably, global stan-
dardization does not completely preclude some degree of local flexibility in financial reporting.
Companies have the freedom go beyond the standards from the FASB and IASB to report addi-
tional metrics and/or provide context for the information that standards require. The diversity
of global markets means it is unlikely that companies in every country will ever apply the same
accounting standards in precisely the same way. However, the high level of alignment and adop-
tion of global accounting standards that exists today allows for a comparison of financial reports
around the world and has contributed greatly to well-functioning global capital markets.

51 Kees Camfferman and Stephen A. Zeff, Financial Reporting and Global Capital Markets: A History of the International Accounting
Standards Committee, 1973–2000 (Oxford University Press, 2007).
52 J.P. Cummings, ‘International Accounting Standards: The Outlook,’ Ross Institute Seminar on Accounting, Vincent C. Ross Institute of
Accounting Research, New York University, 2–8 May 1976.
53 IFRS, ‘Who Uses IFRS Standards?,’ accessed October 2020.
54 Zeff 1999, p. 101.
55 American Institute of Certified Public Accountants, Objectives of Financial Statements (Trueblood Committee Report), 1973, p. 54.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

Figure 3—Timeline of early advancements in standardized disclosure

1938 1966 1973

The Certified Public Accountants (CPA) The first financial reporting standards were The Mexican Institute of Public
Law was enacted in Japan, establishing issued in Australia by the Australian Society Accountants was established to
the accounting profession, though the first of Accountants (ASA) (later became the develop the first accounting
accounting regulation was enacted much Australian Accounting Standards Board) standards in Mexico
earlier in 1895 by the Commercial Code

1918 1946 1968

The Institute of Chartered Accountants in The Dominion Association of Chartered The first guidance on accounting and
England and Wales (ICAEW) established the Accountants took up the role of financial reporting was issued in New
first Accounting Standards Committee (ASC) establishing accounting standards in Zealand with the establishment of the
to develop accounting standards in the UK Canada (later renamed the Canadian Financial Reporting Advisory Board (FRAB)
Institute of Chartered Accountants)

1970s
1930s 1939s • The International Accounting Standards
Global stock market crash leads The American Institute of Committee (IASC) is established to jointly
to the Great Depression Accountant’s (AIA) Committee on develop accounting standards for use across
Accounting Procedures (CAP) is nations
1934 established in the US to provide • The Financial Accounting Standards Boards
US SEC established, guidance on accounting methods (FASB) replaces the ABP in the US
marking the advent of
mandatory corporate
1959 2001
disclosure and regulatory
The Accounting Principles • The IASC evolves into what is know today
reform
Board (APB) replaces the CAP as the International Accounting Standards
to resolve fragmentation in Board (IASB) under the IFRS Foundation
financial accounting practices • IASB Standards are used today in over
140 jurisdictions

Widespread use Growing awareness Multiple accounting methods The concept of decision usefulness is
of historical cost of the consequences are permitted and exceptions introduced, shifting the emphasis of
accounting of capital markets to historical cost accounting financial accounting and disclosure to
that lack are allowed, causing include forward-looking information
transparency fragmentation and limiting and creating a coherent theory that
usefulness to investors enabled global standardization
Disclosure becomes
the basis of
regulatory reform in
financial markets

The importance of standards for the disclosure of financial information—resulting in reliable,

comparable, decision-useful information across markets—can be easily overlooked but cannot be
understated. US Treasury Secretary Lawrence H. Summers notably remarked in 1999:
There is no innovation more important than that of generally accepted account-
ing principles: it means that every investor gets to see information presented on a
comparable basis; that there is discipline on company managements in the way they
report and monitor their activities; that there are whole groups of people all seeking
to refine the way in which we measure and understand how companies’ prospects
are being described and presented.56
Over the years, financial disclosure requirements came online across all major jurisdictions,
creating a common language for companies and investors to communicate across borders and
facilitating the global exchange of capital. Companies now operate in an environment where
financial disclosure using common reporting standards is required by law. However, just because
companies are held to higher standards of transparency achieved through reporting does not
mean they are required to disclose all relevant or interesting information about their business.

56 Lawrence H. Summers, ‘Japan and the Global Economy,’ US Department of the Treasury Press Center, 26 February 1999.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
2 RECOGNIZE why financial accounting and disclosure have evolved to meet the
needs of global capital markets.

? CHECK YOUR UNDERSTANDING

1.  hy was disclosure the basis of regulatory reform in the wake of the 1929 stock market
W
crash?

2. H
 ow has the purpose of accounting changed since the 1930s, and why did financial
reporting move toward standardization?

JUMP TO ANSWERS

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

MATERIALITY:
A GUIDING PRINCIPLE
FOR REQUIRED
DISCLOSURE
3
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:
4 DISTINGUISH how ‘materiality’ is defined and used globally in the context of
reporting.

As just learned in Chapter 2, informed investor decision-making was a primary driver of the
early-to-mid-1900s reforms introduced to protect the interests of the investing public. Required
disclosure exists in large part to ensure companies provide complete, comparable and reliable
information about their financial position, financial performance and prospects, which is used to
make informed investment decisions.
However, not all information about a company’s financial performance is so important that it
would influence investment decisions. Disclosing every single detail, no matter how insignificant,
would result in an overwhelming amount of information that can hinder rather than help investment
decisions. For instance, investors may look at the total number of widgets sold or the costs involved
in operating a business, as these pieces of information are useful when assessing a company’s
prospects and can make a difference in their investment decision. Investors would likely not look
at the number of sales from small product lines or small, routine transactions such as incidental
maintenance expenses or employee training costs, as this information does not alter the overall
financial position, financial performance or prospects of a company. Within early disclosure-fo-
cused reforms, the concept of materiality emerged to help draw a line between the information
companies must disclose and the information they are not required to disclose. Today, materiality
continues to act as a filter companies apply when deciding which information to disclose to those
investors who may (or already do) provide the company with financial capital.

3.1 A
 LONG-STANDING LEGACY OF INVESTOR
DECISION-MAKING
In the context of corporate disclosure, financial regulators first defined ‘materiality’ to commu-
nicate companies’ disclosure requirements and to assess compliance with those disclosure
requirements. For example, the following two definitions were written into early legal doctrines
governing cases of misrepresentation and deceit applied to the sale of securities:

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

• The 1885 Lord Davey Report, a prospectus heavily influenced by the English Chartered
Accountants which shaped early provisions of the British Companies Act,57 stated, ‘Every
contract or fact is material which would influence the judgment of a prudent investor in determining
whether he would subscribe for the shares or debentures offered by the prospectus.’58

• Materiality emerged prominently in the US in the Securities Act of 1933, and at least since
194059 the US SEC has defined ‘material information’ as ‘those matters as to which an average
prudent investor ought reasonably to be informed before purchasing the security registered.’60
One may notice that, though written for different jurisdictions and separated by nearly 50
years, the two definitions are relatively consistent. They are based on the fundamental premise that
investors are entitled to the information that may affect their decision to buy shares in a company,
and that companies are therefore responsible for identifying and disclosing that information.
Of course, the requirement to disclose material information is not the only requirement set
forth by regulators. Financial regulators across the globe mandate the disclosure of specific docu-
ments and types of information to meet investor needs, such as financial statements, known risks
and uncertainties, corporate governance information and so on. Some of these requirements are
specific, such as the company’s legal name and executive compensation, while others are more
ambiguous. So, while disclosure formed the basis of regulatory reform instituted to curb harmful
corporate behavior and to protect the investing public, it became clear that companies needed
more specific guidance to meet the requirements set forth by those very regulations. Accounting
standards were developed to do just that, and as a result, the definitions of ‘materiality’ used by
accounting standard-setters generally correspond to the regulatory definitions.
The table below presents a sample of early ‘materiality’ definitions for accounting standards.
Table 1—Sample of materiality definitions adopted by accounting bodies

YEAR ACCOUNTING BODY MATERIALITY DEFINITION

The American Accounting ‘An item should be regarded as material if there is a

1954 Association Committee on reason to believe that knowledge of it would influence
Concepts and Standards the decisions or attitude of informed investors.’

The Institute of Chartered ‘A matter is material if its non-disclosure,

1968 Accountants in England misstatement or omission would be likely to distort
and Wales the view given by the accounts.’

‘An item must be regarded as material if its omission,

non-disclosure or misstatement would result in distortion
The Australian Accounting of, or some other shortcoming in, the information being
1974
Research Foundation presented in the financial statements, and thereby
influence users of the statements when making
evaluations or decisions.

Source: H. Gin Chong, ‘A Review on the Evolution of the Definitions of Materiality,’ International Journal of Economics
and Accounting 6, no. 1 (2015).

57 William Holmes, ‘Toward Standards for Materiality(?),’ Auditing Looks Ahead: Proceedings of the Touche Ross/University of Kansas
Symposium on Auditing Problems, p. 71, 1 January 1972.
58 The Lord Davey Report, 1895, Cmd. 7779, paragraph 14(5), 1895.
59 David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, ‘Corporate Governance Update: ‘Materiality’ in America and
Abroad,’’ Harvard Law School Forum on Corporate Governance, 1 May 2021.
60 Securities Act of 1934, ‘17 CFR § 230.405—Definitions of terms.’

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

Common language among these early definitions of ‘materiality’ points to concepts that have
been foundational to today’s understanding and application of the term for investor-focused
reporting:

• Materiality is a function of the report user. By focusing on ‘the prudent investor,’ the
‘informed investor’ and ‘users of the statements,’ the first definitions consistently establish
that information is material if it can influence the judgments investors and other providers
of capital make when deciding to provide financial resources to a company.

• Materiality is not about every investor or any one investor. By describing investors
as ‘prudent,’ ‘average’ or ‘informed,’ these definitions acknowledge that investors are not
universally the same. They bring different objectives and levels of expertise. Rather than
attempt to accommodate the information needs of every possible investor, preparers are
asked to consider those who have a baseline level of knowledge and understanding.

• Materiality is contextual. By identifying the ‘omission,’ ‘nondisclosure’ or ‘misstatement’

of information, these definitions focus on the assessment of materiality and maintain that
preparers must consider how investor decisions may be influenced if significant information
is absent, inaccurate or otherwise presented in an unfair manner. In other words, materiality
is not strictly about whether a given piece of information is accurate or not. Rather, it
is about the effect of that information, misstatement or error in the context of a specific
company. If important information is omitted or misstated, investors may be led to make
investment decisions they would not have made otherwise. On the other hand, if a piece
of information, misstatement or error is not pertinent or is too small to influence investor
decisions, it can be left out.

• Material information is not always monetary in nature. Rather than specifying the
type of information that can be considered material, these definitions identify information
using general terms such as ‘an item’ or ‘a matter.’ While it is certainly true that material
financial information is often expressed in monetary terms (i.e., as currency), no definition
specifies that materiality applies only to monetary information. Materiality for investor-focused
reporting can apply to non-monetary metrics (such as the useful life of assets) as well as
qualitative information (such as a discussion of strategy and risk provided in the management
commentary). All material information relates to the financial position, financial performance
and prospects of a company, but it is not always expressed in monetary terms.
Leading up to the 1970s and ’80s, many jurisdictions adopted variations of these ‘materiality’
definitions as they developed their own standards for the disclosure of information in financial
statements. As will be discussed further in Chapter 6, fragmentation across global accounting
rules and standards created challenges for the users of financial statements, as lack of consistent,
comparable information hindered effective corporate-investor communication. The International
Accounting Standards Committee (IASC), which was succeeded by the International Accounting
Standards Board (IASB), was formed to develop universal accounting standards. When the IASC
issued its first standards, it started the journey to establish a globally applicable definition of
‘materiality’ for the first time. Today, its definition has been adopted by more than 140 jurisdictions.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

3.2. GENERAL CHARACTERISTICS OF MATERIALITY

The IASB uses the following definition of ‘materiality’:
Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of general purpose financial
reports…make on the basis of those reports, which provide financial information
about a specific reporting entity. In other words, materiality is an entity-specific
aspect of relevance based on the nature or magnitude, or both, of the items to which
the information relates in the context of an individual entity’s financial report.61
One will notice similarities between this definition and those developed historically. For instance,
it relies on the concept of omissions and misstatements and focuses on investor decision-making.
However, the concept of investor-focused materiality (sometimes referred to as financial materiality)
has evolved over time. A closer look at materiality as it has been defined by the IASB is useful to
understand how it is characterized and applied throughout most of the world today.

3.2.1. A MATTER OF JUDGMENT

When preparing financial reports, determining whether information is material is not prescrip-
tive or formulaic. Rather, it is a matter of judgment specific to a company.
Standard-setting bodies play the important role of setting disclosure requirements, but they
cannot decide what information is appropriate to disclose for any specific company. After all, each
company’s circumstances are unique. Companies have different models and capital structures,
belong to different industries and operate in different areas with unique political, economic, regula-
tory and social environments. When setting standards, the IASB identifies the types of information
it expects will meet the needs of a broad range of primary users for a wide variety of entities under
a range of circumstances.
Disclosure standards therefore provide a starting point for identifying material information.
Preparers must use their judgment to determine what to disclose according to those standards
while considering a company’s unique circumstances. Yet, evaluating company circumstances is
just one part of the process. Companies must also consider the perspectives of users.

3.2.2. PRIMARY USERS AND THEIR INFORMATION NEEDS

Today, companies can expect that various stakeholders will use their financial statements. For
instance, management may consult financial statements to aid the budgeting and planning process,
regulators may use information in financial reports to monitor the health and stability of financial
markets, and other members of the public may seek out financial information for various reasons.
However, these users are secondary to preparers’ disclosure decisions. When determining if infor-
mation is material, one must consider the information needs of primary users of financial reports.
The questions ‘Who are primary users?’ and ‘What are their information needs?’ can be met
with a relatively simple answer. Primary users include existing and potential investors, creditors
and lenders (for convenience, all proceeding text will use the term ‘investors’ as shorthand for all
these providers of capital). They need information to make informed decisions about providing
resources to a company. This aligns with early definitions of ‘materiality’ and is still true today.

61 IFRS Foundation, Conceptual Framework for Financial Reporting, paragraph 2.11.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

When determining if information is material, preparers are tasked with putting themselves in
the shoes of the primary user to consider the influence that information could reasonably have
on those users’ investment decisions. Anyone could therefore view these simple answers with
incredulity. After all, investors often have different goals, priorities and processes for assessing
companies. For instance, equity and debt investors have different expectations when it comes
to tolerable risk, rates of return and the factors that influence a company’s prospects. Impact
investors, angel investors, sovereign wealth funds and others with less typical investment styles
often seek less typical information. Within any style of investing, individuals bring varying levels of
experience and knowledge. How could a preparer possibly meet the information needs of such
a diverse audience?
As discussed in Section 3.1., materiality does not require companies to meet the information
needs of every possible investor. To do so would cause undue burden and cost. Instead, prepar-
ers are asked to disclose information that meets the common information needs of users of their
financial reports. A company that relies primarily on institutional investors for capital will likely find
its investors have slightly different common information needs than, say, a company that relies
primarily on hedge funds or venture capital. To support preparers and create a common baseline
of comparable financial information across markets, financial accounting standards such as those
developed by the IASB articulate baseline assumptions that can be made about the characteris-
tics of primary users and their common information needs.

3.2.2.1. Baseline knowledge and competence

While users often have a variety of individual characteristics and needs, financial accounting
standards identify traits that can be expected of primary users to help guide disclosure decisions.
For example, the IFRS Accounting Standards focus on users of financial reports who have ‘reason-
able knowledge of business and economic activities’ and who ‘review and analyse the information

WHO IS THE ‘REASONABLE INVESTOR’?

Outside the context of the IFRS Standards, the term ‘reasonable investor’ is often used to
describe users of financial statements. Various entities and academics have sought to de-
fine the assumptions preparers should make when characterizing the reasonable investor.
For example, early legal decisions in the US made it fairly clear that a reasonable investor
should not be treated like a ‘nitwit’ or a ‘rube,’ but at the same time should not be expected
to have the sophistication of an investment analyst. The Federal Financial Supervisory Au-
thority (BaFin), the financial regulatory authority of Germany, suggests that the reasonable
investor ‘makes his or her decisions on the basis of an objectively verifiable point of refer-
ence,’ and that ‘specialist expertise is not necessary’ though they are able to ‘consider all
the specific characteristics of an individual case.’ (Source: BaFin, ‘Inside information under
point (a) of Article 7(1) of the MAR,’ Accessed October 2023). Many other examples exist.

While different entities may characterize the reasonable investor in slightly different ways,
they all reinforce the same concept: when making materiality determinations, preparers
should assume that users have a baseline level of competence as a matter of containing
what would otherwise become sprawling disclosure requirements.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

included in the financial statements diligently.’62 When making disclosure decisions, preparers
using IFRS Accounting Standards can assume their users bring this baseline level of knowledge
and diligence, which can help determine how much information and detail to disclose.

3.2.2.2. Identifying common information needs

Assuming the general knowledge and behavior of primary users is useful to understanding
their information needs; however, it is not the only important thing. It is also necessary to consider
the decisions they make. Though these decisions will inevitably vary on the basis of a variety of
factors (such as investment style, investment goals, etc.), financial accounting standards iden-
tify decisions often made by investors to guide preparers in their disclosure process. The IFRS
Accounting Standards, for example, state that these decisions involve:

• buying, selling or holding equity and debt instruments;

• providing or selling loans and other forms of credit; or

• exercising rights to vote on, or otherwise influence, the entity’s management’s actions that
affect the use of the entity’s economic resources.63
Underpinning each of the above three decisions is a focus on future returns. Information
related to future returns (and the cash flows that support those returns) tends to be relevant to
a wide range of investors. Primary users often assess how much the investment will be worth in
the future, when returns can be expected and how high the risk that the investment will lead to
negative returns.
Consequently, financial accounting standards facilitate the disclosure of information deemed
to meet investors’ common information needs. In so doing, standards help preparers provide
focused, relevant information that meets the needs of the maximum number of users while, at the
same time, not preventing the disclosure of additional information that is most useful to particular
subsets of users with interests that extend beyond cash flows and future returns.

3.2.3. MISSTATEMENTS, OMISSIONS AND OBSCUREMENT

When determining whether a piece of information is material, companies must consider
whether its primary users could reasonably be expected to be influenced by the information
when making decisions about providing resources to the company. The concept of omissions,
misstatements and obscurement maintains that assessing if investors could be influenced by the
information is a matter of considering the effect the information in question could have if it is stated
incorrectly, not disclosed or is obscured by unnecessary, immaterial information.

3.2.3.1. Misstatements
Specifically, the concept of misstatements exists to ensure preparers provide accurate infor-
mation. Information can be ‘materially misstated’ if it is incorrect or otherwise inaccurate.
For example, suppose a company realized a portion of its revenue too early, causing an over-
statement of revenue and, as a result, an inflated net income figure. Whether the misstatement

62 IFRS Foundation, IFRS Practice Statement 2 Making Materiality Judgements, paragraph 15.
63 IFRS Foundation, Conceptual Framework for Financial Reporting, 2023.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

was for $1 dollar or $1 million dollars, its materiality would depend on contextual aspects of the
error, such as how much of total revenue was misstated, implications for the company’s earn-
ings, whether it led to a difference between earning a profit or experiencing a loss, what analysts’
expectations were, and whether the misstatement was intentional.

3.2.3.2. Omissions
The concept of omissions exists to ensure companies provide all the information that could
reasonably influence investor decisions. Simply put, prepares must provide enough information
so that the information they have provided is not just free from material misstatements, but also is
not misleading because of what has been omitted.
For example, the IFRS Accounting Standards require disclosure related to The Effects of
Changes in Foreign Exchange Rates (IAS 21). If a company conducts only a small number of
transactions in foreign currencies such that the amount of exchange differences recognized in
profit or loss would be close to zero, a preparer might determine that the effects of omitting such
information are immaterial.
The concept of omissions also sometimes applies to information that goes beyond the
requirements of the standards. To understand this, it is useful to recall that the requirement to
disclose material information is based in securities law and disclosure regulation (see Section
2.2.). Regulators require companies to disclose financial information according to a specific set
of standards, but regulators often specify additional requirements that go beyond the disclosures
detailed in those standards. Accounting standards help companies meet most, but not all, of the
requirements set forth by regulators by providing detailed guidance on how to produce financial
statements. If a preparer identifies information related to its financial statements that is not required
by the standard but may meet the common information needs of primary users, it assesses the
materiality of that information in relation to that provided in its financial statements.
For example, most securities regulators require companies to provide commentary that
expresses management’s view of the company’s performance, including forward-looking informa-
tion that sets out the company’s objectives and strategy for meeting them.64 Say the same company
previously disclosed its growth plan, which identified a strategically important new market that uses a
foreign currency. During the reporting period, the economic environment of the target market shifted,
causing a significant decline in the purchasing power of its primary currency and thus a greater
negative affect associated with the exchange rate. Though not required by financial accounting
standards, the company might determine this event to be material. Furthermore, though the amount
of exchange differences recognized in its profit or loss statement is small, the company could deter-
mine that the effects of changes in foreign exchange rates are material because, if omitted, investors
could reasonably be misled regarding expectations of future cash flows, which had previously relied
on income from purchases made with a stronger currency.

3.2.3.3. Obscurement
The concept of obscurement exists to ensure material information is communicated fairly and
effectively. Obscurement may exist where preparers aggregate information that hides important
details or provides an unnecessary amount of detail to minimize material information.

64 IFRS Foundation, ‘IFRS Practice Statement 1: Management Commentary A framework for presentation,’ December 2020, paragraph
12-17.

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For example, suppose a company experienced a significant decline in profitability in the

last period due to operational challenges and increased competition. However, in its financial
statements and accompanying notes, it presents additional, adjusted numbers and uses lengthy
explanations containing overly complex jargon in a way that conceals the true extent of the decline.
In this case, the preparer may recognize that because of the way the information is presented,
investors could reasonably misunderstand the risks faced by the company and its true financial
position, and thus might determine that information has been materially obscured.

A CLOSER LOOK: THE COMMON INFORMATION NEEDS OF

INVESTORS CAN (AND DO) EVOLVE

To say that the information that influences investment decisions can evolve over time may
at first seem self-evident. After all, financial markets change as new technologies emerge,
economic shifts take place, societal expectations change and investment practices become
more sophisticated. As markets and methods shift, the common information needs of prima-
ry users shifts along with it. An analysis conducted by the US SEC helps illustrate how this
happens in the context of disclosure requirements.
In 1974, the US SEC evaluated the level of investor interest in environmental and civil rights
disclosures as part of a case to determine whether companies should be required to dis-
close certain environmental and social information. To do so, it analyzed two things:
• the value of stocks and bonds in the US that were invested using ethical investing prin-
ciples; and
• support for shareholder proposals (expressed via proxy vote) on environmental and
social issues.
It found that less than 1% of stocks and bonds were invested using ethical investing prin-
ciples and that, on average, between 2% and 3% percent of shareholder proposals on
environmental and social issues received support. Given these results, the US SEC con-
cluded that investor interest in environmental and social disclosures was low and therefore
did not constitute material information. In other words, this type of disclosure arguably did
not meet the common information needs of investors and thus did not warrant additional
disclosure requirements. (Source: Commission Conclusions and Rule Making Proposals, Securities
Act Release No. 5627, Exchange Act Release No. 11773, [1965–1976 Transfer Binder] Fed. Sec. L.
Rep (CCH) ¶ 80, 820 at 85,719-720 (14 October 1975)).

Today, investor interest in such information looks much different. Most investors indicate that
sustainability information influences investment decisions not because it is ethical but be-
cause it is relevant to the financial performance of companies. For instance, an EY survey
of 320 institutional investors around the world found that 86% said that ‘a corporate having a
strong ESG program and performance would have a significant and direct impact on analyst
recommendations today’ and 89% said that they ‘would like to see reporting of ESG perfor-
mance measures against a set of globally consistent standards become a mandatory require-
ment.’ (Source: EY, ‘Is your ESG data unlocking long-term value?’ Sixth global institutional investor
survey, November 2021.). Following the same logic applied by the US SEC, today investors
consider sustainability information material frequently enough to warrant disclosure require-
ments. In this way, the common information needs of investors—or the information considered
material by the majority of investors—are not static. They evolve over time.

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Misstatements, omissions and obscurement exist to some degree in all general purpose finan-
cial reports. Materiality judgment, as one will notice in the above examples, is not a matter of
simply identifying if a misstatement, omission, or obscurement exists. Rather, it is a matter of eval-
uating if the degree of a misstatement, omission or obscurement is enough to reasonably influence
the decisions that investors make on the basis of a company’s reports. Furthermore, preparers can
only judge the degree of a misstatement, omission or obscurement within the context of all other
information provided via a set of disclosure requirements.
In the misstatements example, for instance, materiality is not determined based on the size of
the error alone. Without other information for context (e.g., total revenue misstated, implications for
earnings, etc.), it is impossible to tell if a misstatement in sales could reasonably influence investor
decisions. Similarly, in the omissions example, the materiality of the omission is not only judged
based on the amount of the effects of exchange rates on the company’s profits. It is also judged
based on the effect the omission could have on investors’ expectations of future cash flows in the
context of recent economic events. In the obscurement example, materiality is not determined by
simply asking if material information has been obscured. Rather, it is determined by evaluating the
effect of that obscurement on investors’ ability to understand its financial position.
Ultimately, preparers may come to different conclusions when determining which information
is material based on the company’s unique circumstances. However, for reports to serve as an
effective tool for investor communication, all material information must be included and accurate,
and must not be obscured.

3.3. MATERIALITY CHANGES OVER TIME

The concepts discussed in Section 3.2. outline the general rules for what information compa-
nies are required to disclose and why. Beyond these more technical facets of materiality, it is
important to recognize that assessing the materiality of information and applying judgment to
disclosure decisions is not a onetime event.
A company’s circumstances often change, as do the common information needs of investors,
lenders and creditors. Information determined to be immaterial in the current reporting cycle may
be material in the next, and vice versa. Reassessing materiality over time is necessary to contin-
uously meet the information needs of primary users.

3.4. N
 UANCES THROUGHOUT THE DISCLOSURE
ECOSYSTEM
This chapter focuses on materiality in the context of financial reporting and investor deci-
sion-making. However, the term ‘materiality’ is used in a variety of settings, both with capital
markets and beyond.
For instance, the audit profession applies the concept to identify areas in company reports that
may be at risk of material misstatements and to define tolerable levels of error. Risk management
professionals may apply materiality in financial and non-financial contexts to assess and prioritize
risks that could significantly impact a company. Indeed, standards and frameworks developed to
support voluntary disclosure, such as those from the Global Reporting Initiative (GRI) and others,
apply materiality to impact-focused and other types of reporting (more on this in Chapter 7).

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

While these applications of materiality may be related to definitions applied to investor-focused

reporting, they are not exactly the same. The investor-focused definitions of ‘materiality’ discussed
in this chapter are judged in the context of the user of financial reports. In other applications, such
as auditing, risk management and voluntary reporting, materiality is judged in the context of other
decision makers and therefore will be interpreted differently. This can lead to confusion and misun-
derstanding. Professionals who work within the ESG landscape can benefit from an awareness of
when materiality applies to investor-focused reporting and when it does not.
The concept of materiality emerged as a central component of required financial reporting
to prevent companies from becoming overburdened by disclosure demands while, at the same
time, ensuring investors are provided with complete, decision-useful information. However, as
markets have evolved, companies, investors and other entities within capital markets began to
recognize that financial reports alone do not necessarily create a complete body of decision-use-
ful information.

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
4 DISTINGUISH how ‘materiality’ is defined and used globally in the context of
reporting.

? CHECK YOUR UNDERSTANDING

1.  hy did materiality emerge in early regulation governing financial reporting? What
W
purpose does it serve?

2. What concepts underpin investor-focused materiality?

3. A
 s defined by accounting standards, who are primary users and what are primary
users’ objective(s)?

4. What are the concepts of omissions, misstatements and obscurement?

JUMP TO ANSWERS

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

THE LIMITATIONS
OF FINANCIAL
DISCLOSURE 4
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:
2 RECOGNIZE why financial accounting and disclosure have evolved to meet the
needs of global capital markets.

Companies have traditionally communicated how they create value and answered investors’
questions though required financial statements and an accompanying narrative explanation of
the financial statements. These statements go by slightly different names in different jurisdictions
but generally include:

• the balance sheet;

• income statement;

• statement of cash flows; and

• statement of stockholders’ equity.

However, today, companies often choose to disclose more information than is required. Since
the standardization of accounting practices several decades ago, it has become increasingly clear
that while financial statements are a critical component to well-functioning markets, they alone do
not provide all the information necessary to inform investor decisions.
Financial reports today include high-quality, comparable information because of the work of
the IASB, the FASB and other national standard-setting organizations. However, in recent years,
companies, investors and other users of information in capital markets have been paying more
and more attention to information outside of financial statements. Important factors not captured in
financial statements often influence a company’s financial position and performance. As a result,
there is growing recognition that reporting needs to evolve to capture these additional factors.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

4.1. F
 INANCIAL INFORMATION BEYOND FINANCIAL
STATEMENTS: THE USE OF NON-GAAP
Outside of standardized financial statements, companies often choose to report non-GAAP
measures, or information that draws from the financial statements but is not part of generally accepted
accounting principles. One of the most common non-GAAP measures is earnings before interest,
taxes, depreciation, and amortization (EBITDA), which provides an alternative measure of a compa-
ny’s profitability or cash flow not subject to standardized financial accounting practices.
Companies use non-GAAP reporting to supplement core financial statements and highlight
information not required by standardized disclosure, such as a change in operating structure or
the impacts of a merger or acquisition. Since the 1990s, companies increasingly use non-GAAP
measures to report adjusted earnings when the company believes an adjusted metric provides a
better understanding of the business to investors.65 Many investors value non-GAAP measures as a
means to more accurately assess corporate value, as opposed to exclusively relying on companies’
reported GAAP information.
The use of non-GAAP measures has grown dramatically in the past three decades. Trends in
non-GAAP reporting highlight the fact that the financial statements alone—though incredibly import-
ant—do not provide a complete picture of corporate performance. Yet non-GAAP measures are still
financial metrics derived from financial statements. Companies also broadly recognize that financial
information alone (GAAP or non-GAAP) does not provide a complete picture of a company either.
For decades, companies have increasingly recognized the need to account for phenomena that are
not captured in financial statements but directly influence a company’s financial position, financial
performance and prospects. In turn, investors increasingly rely on and request additional information
to support their assessment of risk and return.
Figure 4—Intangible assets as a percentage of
market value
4.2. T
 HE CHANGING Intangible Assets Tangible Assets
NATURE OF 100%
83% 68% 32% 20% 16% 10%
MARKET VALUE 90%
80% 84%
As discussed in Chapter 2, the way we 80%
think about standardized financial accounting
68%
was largely shaped by 20th-century devel- 60%

opments aimed at better informing investor

decision-making. The founding of both the 40%

IASC and the FASB in 1973 coincided with a

32%
time when the market capitalization of large 20%

companies was primarily tied to the value of 17%

tangible assets presented in financial state-
ments. In 1975, tangible assets made up 83% 1975 1985 1995 2005 2015 2020
of the market value of the S&P 500.66 Since Source: Ocean Tomo, Annual Study of Intangible
the formation of these foundational standards Asset Market Value, 2020.

65 Seanna Asper, Chris McCoy, and Gary K. Taylor, ‘The Expanding Use of Non-GAAP Financial Measures Understanding Their Utility
and Regulatory Limitations,’ CPA Journal, July 2019.
66 Ocean Tomo, Annual Study of Intangible Asset Market Value, 2020

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

bodies, the composition of market value has changed significantly. In 2020, the value of tangible
assets accounted for only 10% of the S&P 500 market value, while intangible assets represented
90%. This trend is corroborated by other global indexes, such as the S&P Euro 350 Index, in which
intangible assets composed 74% of the total value in 2020.67
While the precise values proposed by this study can be debated, there is no doubt of its
directional accuracy. The dynamic of a changing world and changing investor focus is perhaps
most readily apparent in our financial markets, where the difference between the book values
listed on balance sheets and the market values reflected in stock prices has grown wider. When
market valuations are increasingly based on intangibles, such as intellectual capital, customer
relationships, brand value and other ‘soft’ assets, traditional financial statements tell an increas-
ingly smaller part of the story—by some estimates, as little as 5%.68
It is not simply that intangible assets represent value drivers that are unaccounted for by
traditional methods. In the absence of applicable accounting metrics, intangibles are particularly
susceptible to mispricing by the market. Investors tend to misprice shares of intangibles-intensive
companies, either overvaluing or undervaluing assets to the detriment of investors and companies
alike.69 Indeed, there are many non-monetary resources—such as human, social and natural capi-
tal—that are not recognized on corporate balance sheets under financial accounting rules. For
this reason, investors seek information to complement the information that is available in financial
statements because sustainability issues are business issues, too.

4.3. THE SCOPE OF FINANCIAL REPORTING EXPANDS

Recognizing that a large amount information relevant to corporate financial performance
was not being captured in financial statements, companies began experimenting with efforts to
measure non-financial value drivers to communicate a more holistic view of financial performance.

CLARIFICATION ON THE USE OF THE TERM ‘NON-FINANCIAL’

Financial and accounting literature often use the term ‘non-financial’ to describe measures
that are not disclosed in financial statements but are useful for understanding the financial
performance, financial position and prospects of a company.

The information in financial statements is often expressed in monetary terms. They con-
tain line items expressed quantitatively in units of currency. It makes sense, then, that
‘non-financial’ would refer to information outside of financial statements. However, financial
statements include non-monetary measures as well. Specifically, notes to the financial
statements contain both qualitative and quantitative information, including quantitative infor-
mation that is not expressed as currency. For example, the useful life of assets is expressed
in terms of number of hours or total units of production.

The term ‘non-financial’ is used in Chapter 4 and in other select instances throughout the
curriculum where it is necessary to accurately portray referenced literature. However, the
terms ‘non-monetary’ or ‘extra-financial’ are used in other areas to avoid confusion.

67 Ocean Tomo, Annual Study of Intangible Asset Market Value.

68 Baruch Lev and Feng Gu, The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance, 2016)
69 Baruch Lev, Sharpening the Intangibles Edge (Harvard Business Review, 2004)

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

The growth of companies’ use of non-financial information was accelerated by market

demands for corporate governance information in response to management scandals as well as
innovations in methodologies to capture social and environmental performance.

4.3.1. THE RISE OF NON-FINANCIAL REPORTING

The value of information beyond financial statements was explicitly endorsed by several
key organizations in the financial reporting community during the 1990s and 2000s. Although
these organizations were exclusively, or at least primarily, focused on financial statements, they
supported the idea that business reporting could be improved to better serve the needs of users
of those reports.
In the early 1990s, the American Institute of Certified Public Accountants (AICPA) formed the
Special Committee on Financial Reporting (also known as the Jenkins Committee) in response to
concerns about the relevance and usefulness of business reporting. The committee’s key conclu-
sions and recommendations called for improved business reporting that, in addition to financial
statements, included valuable non-financial information. Specifically, the report identified the value
of ‘material trends, demands, commitments, concentrations, or events … known to management
that would cause reported information not to be indicative of future core earnings, net income,
cash flows, or future financial condition.’70 This includes forward-looking information, such as
management’s plans and the company’s opportunities and risks, and ‘nonfinancial measures
indicating how key business processes are performing.’71
Shortly after the AICPA’s report, the Association for Investment Management and Research,
now called the CFA Institute, released a report that reached similar conclusions. Titled Financial
Reporting in the 1990s and Beyond, the report determined that financial statements are one
component of a comprehensive business reporting model that serves users, and it encouraged
management to ‘disclose and discuss their strategies, proposed tactics and plans, and expected
outcomes.’
Following these findings, the FASB formed the Business Reporting Research Project to review
how companies could improve their reporting to be more relevant and useful. In the early 2000s,
the FASB issued Improving Business Reporting: Insights into Enhancing Voluntary Disclosures,
in which it found that leading companies in select industries voluntarily included some non-finan-
cial information that was useful to investors. It also found that the importance of this information
was likely to increase. The FASB noted that the most useful and relevant disclosures included:

• the factors that influence a company’s success;

• its strategy for managing those factors; and

• the metrics for evaluating the company’s management of those success factors.72
As prominent organizations in the finance profession, the AICPA, the CFA Institute and the
FASB all helped accelerate the growing recognition of the value of non-financial or ‘extra-financial’
information. Some of the earliest efforts to require the disclosure of non-financial information are
represented by the existence of the Management Commentary portion of financial disclosures

70 AICPA, Jenkins Committee Report (1994), p. 54

71 AICPA, Jenkins Committee Report, p. 4.
72 FASB Steering Committee Report, Improving Business Reporting: Insights into Enhancing Voluntary Disclosures, 2001.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

aligned with IFRS Accounting Standards and the Management’s Discussion and Analysis (MD&A)
of regulatory filings in the US, which provide space for company management to deliver important
contextual information or additional details needed to interpret performance.

4.3.1.1. The views of management

Alongside financial statements, companies are expected to disclose a narrative from manage-
ment to discuss their financial position and provide the necessary context for interpreting future
performance. Specifically, the IASB requests the disclosure of Management Commentary, or a
narrative report that provides information outside of financial statements that ‘assists the inter-
pretation of a complete set of financial statements or improves users’ ability to make economic
decisions.’ In the IFRS Accounting Standards, it recognizes the Management Commentary as
a reporting instrument at the intersection of financial reporting and corporate reporting to other
stakeholders,73 stating that companies should prepare it according to two key principles:
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).’74
The IASB further defines the Management Commentary according to five reporting elements:
historical financials, other subject matter disclosures (including climate disclosure), business
description, management information and market data, and management perspectives.75 Notably,
in 2017, the IASB initiated a project to revise guidance to companies preparing the Management
Commentary. Among other factors, the project sought to establish guidance on three matters of
interest to investors: ‘matters that could affect an entity’s long-term prospects; the entity’s intan-
gible resources and relationships; and ESG matters.’76 While the core purpose of Management
Commentary and its narrative format will stay the same, the IASB recognized that in the future it
may become more rigorous as it seeks to more clearly provide ‘insight into the company’s strategy
for creating shareholder value over time, its progress in implementing it, and the potential impact
on future financial performance not yet captured by the financial statements.’77
The US SEC similarly requires the disclosure of management discussion and analysis (MD&A),
which is a description of a company’s overall financial condition, results of operations, and
management’s view of known trends and uncertainties that are reasonably likely to have a ‘mate-
rial effect’ on results of operations and financial condition. The US SEC emphasizes four points
regarding the focus and content of MD&A:
1. Focus on material information: Companies should focus on material information and
eliminate immaterial information that does not promote an understanding of companies’
financial condition, liquidity, capital resources, changes in financial condition and results
of operations (both in the context of profit and loss and cash flows). Moreover, issuers are
required to provide other material information necessary to make the required statements,
in light of the circumstances in which they are made, not misleading.78

73 IFRS Foundation, ‘Introduction to Management Commentary,’ March 2018.

74 IFRS Foundation, Practice Statement 1 Management Commentary.
75 IFRS Foundation, ‘Introduction to Management Commentary.’
76 IASB, ‘Update: Management Commentary,’ October 2020, accessed November 2020.
77 IFRS Foundation, ‘Introduction to Management Commentary.’
78 See Securities Act Rule 408 [17 CFR 230.408], Securities Act of 1933 Section 10(b) [15 USC §78j(b)], Exchange Act Rule 10b-5 [17
CFR 240.10b-5] and Exchange Act Rule 12b-20 [17 CFR 240.12b-20].

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

2. Include key performance indicators: Companies should identify and discuss the key
performance indicators, including non-financial performance indicators, that management
uses to manage the business and that would be material to investors. The commission
encourages the use of non-financial metrics that promote comparability across companies
within an industry.
3. Disclose known trends and uncertainties: Companies must identify and disclose known
trends, events, demands, commitments and uncertainties that are reasonably likely to have
a material effect on financial condition or operating performance, including forward-looking
information, as discussed previously. The US SEC has specified that the ‘reasonably likely’
threshold for disclosure ‘is lower than “more likely than not.”’79
4. Analyze the information that is disclosed: Companies should provide not only information
responsive to MD&A’s requirements but also an analysis that is responsive to those
requirements. The analysis must explain management’s view of the implications and
the significance of that information, and satisfy the objectives of MD&A. The analysis
should explain the underlying reasons or implications of the trends or uncertainties, the
interrelationships between their parts or their relative significance. Further, the analysis
should describe the causes of the trends and uncertainties.
While the details of the US SEC’s MD&A requirements help illustrate the nature of non-financial
information reported within regulatory financial filings, it is important to note that securities commis-
sions in other jurisdictions also require the disclosure of an MD&A or a similar narrative. Given the
expectation that companies report forward-looking information with potential effects on financial
performance, disclosures that call for the views of management was one of the first locations for
companies to disclose sustainability information in financial filings.

4.3.1.2. Corporate governance codes curb corruption

The inability of financial statements to cover all relevant and useful corporate disclosures is
also highlighted by the rise of corporate governance codes enacted in response to corporate
misconduct. Events such as the Siemens bribery scandal in Germany, the Steinhoff scandal in
South Africa, the Toshiba accounting scandal in Japan, and the Enron and WorldCom scandals in
the US have contributed to major disruptions that have shaken the public’s trust in capital markets.
These highly publicized failures in corporate governance helped motivate the development
of corporate governance best practices and higher standards of transparency and accountabil-
ity. Whether mandatory (as is the case with Japan’s Corporate Governance Code for JPX-listed
companies and the US’s Sarbanes-Oxley Act) or voluntary (such as the Best Corporate Practices
Code [CMPC] issued by the Mexican Business Coordinating Council), corporate governance
codes and guidelines on disclosure help ensure companies report information about how execu-
tives and board members abide by principles of good corporate governance.
Codes of corporate governance may define best practices for equal treatment of sharehold-
ers, set standards for oversight of disclosure and transparency, and set expectations for boards
regarding ethical practices, accountability and fair representation of a company’s position and
prospects. Where financial statements cannot, corporate governance codes help companies

79 Securities and Exchange Commission, ‘Commission Statement about Management’s Discussion and Analysis of Financial Condition
and Results of Operations,’ release nos. 33-8056, 34-45321, and FR-61, 22 January 2002.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

communicate how boards make decisions and ultimately lead the company, thus granting inves-
tors insight into a board’s oversight of issues with the potential to harm financial position, financial
performance and prospects.

4.3.1.3. Environmental information

To generate more robust non-financial information related to corporate performance, compa-
nies have also turned their attention to the measurement and management of environmental
factors. Tools such as product lifecycle analysis (LCA), greenhouse gas (GHG) accounting and
other industry-specific instruments have increased in popularity as concerns regarding resource
depletion and environmental impact have grown.
There have also been attempts to apply the practice of accounting to measure and record
environmental information. Disciplines such as environmental cost accounting (ECA) and the
use of environmental profit and loss statements (EP&L) emerged in the 1990s to capture and
attribute environmental costs directly to a company’s activities. ECA aims to analyze cause-and-
effect relationships to identify the source of and measure environmental impacts.80 EP&L seeks to
assign a monetary value to the environmental costs associated with certain business activities.81
Environmental accounts like ECA and EP&L offer tools for companies to evaluate their environ-
mental impacts through an adapted system of measuring and managing performance. While such
tools can help companies understand operational efficiencies and environmental externalities,
facilitating investor-focused communication is not their primary purpose.

4.4. NEW TOOLS FOR INVESTORS

In addition to companies looking to measure and report extra-financial information, and specif-
ically sustainability information, to communicate performance, investors also increasingly look to
sustainability information to inform investment decisions.

4.4.1. THE GROWTH OF THEMATIC AND RESPONSIBLE INVESTMENT STRATEGIES

In its earliest forms, investor use of sustainability information emerged to enable
negative screening—that is, the avoidance of investments found to be objectionable. Many
attribute to first use of negative screening to faith-based investors—those seeking to align their
investments with their religious values. Values-based investing can also be traced to the 1960s,
when students protested and called for divestment from companies profiting from the Vietnam War.
In the 1980s, protests and calls for divestment from South Africa were central to the anti-apart-
heid movement—anti-apartheid protesters, particularly those on university campuses, sought to
divest from companies doing business in South Africa as a way to effect change from government
officials.82 Though rooted in faith-based practices and the political aims of a dissenting citizenry,
this early use of social information and the practice of divestment and negative screening helped
establish the idea that capital can be mobilized for reasons other than the singular pursuit of
generating financial returns. The concept has since been applied to investment decisions more
broadly, where investors screen out other ‘sin stocks’ to align their investments with personal,
social and environmental aims.

80 Peter Letmathe and Roger K. Doost, ‘Environmental Cost Accounting and Auditing,’ 1 November 2000.
81 Vistage International, ‘Environmental Profit and Loss (EP&L): What You Need to Know,’ 19 September 2018.
82 Gregory Gethard, ‘Protest Divestment and the End of Apartheid,’ 25 June 2019.

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In the 1970s, the investment industry experienced an increase in investment firms dedicated
exclusively to social and environmental impact and improving the sophistication of sustainability in
investing. Using an investment strategy dubbed socially responsible investing (SRI), firms such as
Calvert Investment Management (now Calvert Research and Management), Pax World Funds (now
Impax Asset Management) and Walden Asset Management (now Boston Trust Walden) emerged
as investment firms that were dedicated exclusively to values-based investing. Over time, such
firms meaningfully grew their assets under management but operated, for the most part, outside
the mainstream. Today, the use of ESG information among all investor types continues to expand
beyond negative screening and values-aligned investing through the practice of ESG integration.
In fact, about US$121.3 trillion of assets under management as of 2022 are managed by signa-
tories to the Principles for Responsible Investment (PRI),83 which promotes the incorporation of
ESG factors into all investment decisions. A Morgan Stanley survey of institutional asset owners
found that 95% are integrating or considering integrating sustainable investment practices into
their portfolios.84 Similarly, a CFA Institute survey of more than 1,500 portfolio managers found that
73% take ESG issues into account when making investment analysis decisions, with demand from
clients and investors serving as the primary driver.85 Meanwhile, a joint survey conducted by UBS
Asset Management and Responsible Investor found that ESG integration is growing rapidly, with
78% of equities integrating ESG.86 These developments make sense in the context of the trends
outlined above. As the market value of equities has become less tangible, sensitivities to sustain-
ability risks, the management of those risks and regulatory attempts to address them have risen.
Investors factor risk into the returns they require for accepting such risk, raising a firm’s cost of
capital. In other words, as risk (or the perception of risk) increases, costs of capital and discount
rates increase—leading to higher hurdle rates and decreases in valuations—and vice versa.
By integrating ESG information, investors find they can more accurately assess the level of risk
associated with an investment.

4.4.2. RESPONSE TO SHORT-TERMISM

To some extent, the increased focus of investors on sustainability information may be viewed
as a market correction. In recent years, investors and business leaders alike have bemoaned the
deleterious effects of extreme ‘short-termism’: a growing pressure put on corporate executives to
meet near-term earnings projections at the expense of long-term value creation. Although short-
term investors increase market liquidity, critics argue that persistent, extreme short-termism will
result in diminished public confidence, depressed economic growth and reduced investment
returns. At its worst, short-termism may undermine the efficiency of capital markets by contribut-
ing to the mispricing and misallocation of assets because of a lack of reliable information about
long-term prospects. Evidence shows that earnings myopia is both real and pervasive. Surveys
indicate that the overwhelming majority of CFOs would put long-term value at risk to meet short-
term earnings targets. For example, 80% have said they would decrease discretionary spending
(such as R&D or advertising), while 39% have said they would incentivize customers (by, for exam-
ple, offering them discounts) to make early purchases to meet short-term expectations.87

83 PRI, Annual Report 2022, p.2, 2023.

84 Morgan Stanley, ‘Sustainable Signals: Asset Owners See Sustainability as Core to the Future of Investing,’ 2020.
85 CFA Institute, ‘Environmental, Social and Governance (ESG) Survey,’ 2017.
86 UBS Asset Management—Global, ‘ESG integration: The Upward Trend,’ 1 April 2020.
87 John R. Graham, Campbell R. Harvey and Shiva Rajgopal, ‘Value Destruction and Financial Reporting Decisions,’ Financial Analysts
Journal 62, no. 6 (2006): 31.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

The detriments of short-termism are not lost on capital markets participants. According to a
McKinsey & Company survey of global board members and C-suite executives, 86% believe that
‘using a longer time horizon to make business decisions would positively affect corporate perfor-
mance in a number of ways, including strengthening financial returns and increasing innovation.’88
Research supports this position. For example, a 2017 study found that firms with a long-term
mindset consistently outperform industry peers on nearly ‘every financial measure that matters.’89
Overcoming the effects of extreme short-termism is likely to require a commitment by all key
participants in the investment value chain—not just by companies but by asset owners and asset
managers as well.90

4.4.3. THE EVOLUTION OF FIDUCIARY DUTY

As investors’ use of sustainability information evolved, so did the concept of fiduciary duty.
Fiduciary obligations exist to ensure that trustees who manage other people’s money act in the
best interests of their clients or beneficiaries rather than serving their own interests. Although differ-
ent definitions and legal interpretations of ‘fiduciary duty’ exist, a common misconception is that it
legally compels asset managers to solely maximize financial returns. However, this misconception
is becoming less common as the material effects of sustainability issues on financial performance
become more clearly defined. In fact, a 2005 United National Environment Programme (UNEP)
Finance Initiative report states, ‘In our opinion, it may be a breach of fiduciary duties to fail to take
account of [environmental, social, and governance (ESG)] considerations that are relevant and to
give them appropriate weight, bearing in mind that some important economic analysts and lead-
ing financial institutions are satisfied that a strong link between good ESG performance and good
financial performance exists.’91 A 2015 follow-up report (Fiduciary Duty in the 21st Century) states
unequivocally, ‘Failing to consider long-term investment value drivers, which include environmen-
tal, social and governance issues, in investment practice is a failure of fiduciary duty.’
The largest institutional investors own such a significant share of global assets that many
have adopted a ‘universal owner’ approach. They consider not only portfolio-level returns but
also the opportunity to stimulate wider economic growth, which is also in the best interests of
their beneficiaries. The fiduciary’s duty of loyalty calls for impartial treatment of different types of
beneficiaries, including different generations.92 Because climate-related risks and the abatement
of environmental degradation can shift wealth between generations (benefiting older generations
while leaving younger generations with climate and environmental ‘debt’), the duty of loyalty with
regard to future generations is increasingly called into question. ‘Failure to adopt a sustainable
development investment approach can have fiduciary duty implications and can raise questions
about the ability of fiduciaries to efficiently allocate investment capital to growth opportunities and
manage risks to economic growth and future portfolio returns.’93 There are a range of strategies
for integrating sustainability into fund management, and generally they would be viewed as legally
viable when they are assessed within prudent investment rules. In fact, fiduciaries, who have a

88 Domonic Barton and Mark Wiseman, ‘Focusing Capital on the Long Term,’ McKinsey & Company, 1 December 2013.
89 Dominic Barton, James Manyika and Sarah Keohane Williamson, ‘Finally, Evidence That Managing for the Long Term Pays Off,’
Harvard Business Review, 7 February 2017.
90 Kelly Tang and Christopher Greenwald, ‘Long-Termism vs. Short-Termism: Time for the Pendulum to Shift?,’ S&P Dow Jones Indices
Research, April 2016.
91 UNEP Finance Initiative, ‘A legal framework for the integration of environmental, social and governance issues into institutional
investment,’ October 2005.
92 James P. Hawley, Keith L. Johnson and Edward J. Waitzer, ‘Reclaiming Fiduciary Duty Balance,’ Rotman International Journal of
Pension Management 4, no. 2 (September 2011): 4.
93 Keith Johnson, Introduction to Institutional Investor Fiduciary Duties (International Institute for Sustainable Development, February
2014), p. 8.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART I: THE NEED FOR SUSTAINABILITY DISCLOSURE STANDARDS

duty of prudence, can benefit from considering material sustainability information as sustainabil-
ity becomes increasingly relevant to a company’s performance, for both risk management and
growth opportunities.
These marked shifts in the way investors approach sustainability and value sustainability
information have led to increased demand for quality sustainability data and contributed to the
growth of a robust ESG data industry and reporting ecosystem.

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
2 RECOGNIZE why financial accounting and disclosure have evolved to meet the
needs of global capital markets.

? CHECK YOUR UNDERSTANDING

1. What does the rise of intangible assets mean for corporate disclosure?

2. What factors contribute to increasing investor interest in sustainability information?

JUMP TO ANSWERS

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 44

PART II
THE SUSTAINABILITY
INFORMATION ECOSYSTEM
As companies and investors realized the benefits of sustainability
information, efforts to improve access to and the quality of sustainability
information proliferated global markets. Many standards and frameworks
for sustainability reporting came online, as did increasingly innovative and
specialized data products and services. The maturation of the sustainabil-
ity disclosure landscape is encouraging with respect to the progress that
has been made, but the variety of standards, regulations, ratings and data
providers and other players can often be confusing and difficult to navi-
gate. Companies are left wondering what sustainability information to report,
often using multiple standards and frameworks to meet various information
demands, while investors are left to wade through noisy data in attempts to
identify the most relevant information.
Part II provides:

• a breakdown of the sustainability information value chain, including

the relationships data providers, standard-setters and regulators;

• an overview of the path to simplify sustainability disclosure standards

and frameworks;

• a discussion of materiality in the context of sustainability disclosure;

and

• an overview of regulatory sustainability disclosure requirements.

FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

INTRODUCTION TO
THE SUSTAINABILITY
INFORMATION VALUE
CHAIN AND THE ROLE
5
OF DATA PROVIDERS
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:

5 RECOGNIZE the roles of the organizations that make up the sustainability

information value chain.

5.1. G
 ROWTH OF THE ECOSYSTEM: A MATURING
INDUSTRY
The sustainability information ecosystem is characterized by increasing maturity. Driven by
market forces and investor demand, more and more organizations are participating in the ESG
marketplace than ever before, and products and services are becoming increasingly specialized.
Many of these participants play an important role in influencing the supply, demand and quality
of sustainability information in capital markets, together forming a value chain of information. The
roles of these participants are summarized in the figure below:

Figure 5—The sustainability information value chain

Information producers Information users

Disclosure
Platforms and Frameworks Data Analytics
Reporters Auditors End Users Regulators
Software and Standards Providers Platforms
Providers
Reporters collect, Software providers Auditors use Conceptual Data providers Analytics platforms Investors and other Regulators are
validate, set up and disclosure standards as criteria frameworks aggregate provide ratings and stakeholders such increasingly
internal platforms enable against which they information and advanced analysis as civil society, interested in
controls/procedures, filers to collect and provide external Disclosure make it available capabilities. communities, sustainability
involve external report information. assurance and other topics through senior executives, information, with
audit, and then related services. technology tools. employees, some moving to
publish the Software providers Disclosure customers, mandate it in
information. also help standard requirements governments, accordance with
setters to build and suppliers standards, and
taxonomies and will consume the some using the
information available data information for
validation pathways. and analysis. regulatory purposes.

UNDERPINS ALL INFORMATION

Source: Derived from “Statement of Intent to Work Together Towards Comprehensive Corporate Reporting”

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 46

FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

Within the information value chain, three types of organizations play an outsize role in influ-
encing the sustainability information available to capital markets. They are:
1. standard-setters: the organizations that provide voluntary and mandatory requirements for
corporate sustainability disclosure;
2. data providers: the companies that provide data-related products and services, including
those that aggregate and sell data and those that provide ratings and/or analytics; and
3. regulators: the bodies and agencies that mandate and enforce the use of sustainability
disclosure standards.
The remainder of this chapter focuses on the role of data providers and data-related chal-
lenges, before delving deeper into the role of standard-setters (in Chapters 6) and regulators (in
Chapter 8).

5.2. THE ROLE OF DATA PROVIDERS

Investors source and consume data through a variety of channels. These include primary
sources such as annual reports, quarterly financial statements and regulatory filings. They also
include secondary sources such as news media and data providers, or third-parties that offer
aggregated datasets, analytics and ratings. For example, companies such as Bloomberg, FactSet,
Refinitiv and others offer advanced platforms and access to robust financial databases and analyt-
ics platforms that source, aggregate and present data from multiple companies, sectors and
markets, allowing investors to research and compare financial information efficiently. In today’s
digital age, these data products and services have become essential tools for investors to access
and analyze financial data in real time, facilitating more informed investment decisions. With inves-
tor interest in sustainability information higher than ever before, similar data-focused products and
services have emerged for sustainability.

5.2.1. DATA AGGREGATORS

Like their financial industry predecessors, sustainability data aggregators collect and present
data, making it possible for investors to access data from a variety of companies in one place.
Each has proprietary methodologies for sourcing and organizing data, as well as solutions offered
to support analysis.
Aggregators tend to focus on two primary data types: structured and unstructured. Structured
data is largely quantitative, such as stock values and water-use quantities, and can be clearly
organized in a relational database, thus enabling easy analysis. Unstructured data tends to be
text-heavy. In the context of ESG information, unstructured data often includes text files, news
articles, earnings-call transcripts, reports or other information that cannot easily be stored in a rela-
tional database94 and can therefore be much harder to analyze. Historically, a significant portion
of sustainability reporting, if not most of it, has been narrative or unstructured. Data aggregators
thus provide a useful way for investors to use the information.
Aggregators focused on structured data will source publicly available company and market
data and make it available to users on a common platform. To organize their systems, aggregators

94 Bernard Marr, ‘What Is Unstructured Data and Why Is It So Important to Businesses? An Easy Explanation for Anyone,’ Forbes, 16
October 2019.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

each determine the data fields used to store the information they aggregate based on both the
availability of information and the information demanded by customers, who are often investors.
Some of these aggregators might adjust company-reported data to improve comparability and
alignment with predetermined data fields that the aggregator covers.
Other structured data aggregators will source data directly from companies via voluntary
surveys or data requests. In so doing, they create standardized datasets from each participat-
ing company and are thus able to benchmark company performance and generate insight into
each company’s comparative standing on specific sustainability topics. Some survey-based data
aggregators include information only from participating companies, whereas others populate
data based on publicly available information and/or estimated data based on the averages
of peers compared with that from the non-participating company, adjusting for factors such as
revenue or number of products or number of employees. These aggregators determine the survey
questions used to collect data. The questions may change over time depending on participant
feedback, the quality of results and client needs. Prominent examples of survey-based data
aggregators focused on ESG information include B Analytics, the Carbon Disclosure Project
(CDP), the Global Real Estate Sustainability Benchmark (GRESB) and S&P Global’s SAM Corporate
Sustainability Assessment (CSA).
Unstructured data aggregators often provide information from sources other than company
reports. This allows the aggregator to surface third-party perspectives. Rather than using specific
data fields (typically quantitative), unstructured data aggregators determine the categories (typi-
cally qualitative) of information to be analyzed. For example, a category such as Employee Health
& Safety would include documents, articles and other qualitative information that provides insight
into employee health and safety. These aggregators may develop proprietary categories or may
use categories based on independent frameworks (like those of the SASB Standards or the UN
Sustainable Development Goals). Corporate performance measured with unstructured data can
change more often than that measured with structured data, since companies typically report
ESG data once a year, while third-party information about a given company can change daily.
Prominent examples of unstructured data aggregators include RepRisk and Truvalue Labs.
Investors can, and do, use both structured and unstructured data aggregators to track
company performance over time or to compare peer companies.

5.2.2. ESG RATINGS AND ANALYTICS PROVIDERS

Unlike data aggregators, which primarily provide raw underlying data, ESG ratings and analyt-
ics providers each employ a unique methodology for scoring or ranking individual companies
relative to one another. Some companies may offer multiple assessments or sub-scores for a given
company on a specific ESG topic, such as GHG emissions. ESG scores and rankings can provide
a simpler way for investors to assess companies than developing in-house methodologies to
analyze the underlying data. They also allow comparative ESG assessment over time and in rela-
tion to industry peers and competitors. Prominent examples of ESG ratings and analytics providers
include Institutional Shareholder Services (ISS) ESG, MSCI, Sustainalytics and Vigeo Eiris.
While it is useful to distinguish aggregators from ratings and analytics providers, many
companies offer products and services that fall into more than one of these categories. For
instance, some companies provide database access in addition to scores and ratings. Indeed,
as ESG-integrated investing becomes more sophisticated, many look to ratings and analytics
providers to offer access to underlying data so that investment firms can develop their own ESG
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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

scoring models in addition to the rating and analytics providers’ analyses.

5.2.3. DATA PRODUCTS SHAPED BY CUSTOMER NEEDS

By and large, data providers tend to be for-profit companies. Catering to their investor and
analyst customers, they develop products and services shaped by customer-focused feedback.
As a result, ESG data products tend to be shaped by the ‘information users’ on the sustainability
information value chain, and not by the companies producing the sustainability information upon
which the products rely. Indeed, reporting companies and the public typically have minimal visi-
bility into the proprietary ‘black box’ methodologies of ratings and analytics providers. As clients
of these vendors, investors tend to have a clearer view to these methodologies but rarely have
total transparency.
This contrasts with the approach of standard-setting organizations, which are non-profit, are
characterized by transparent due process and rely heavily on feedback from both information
producers and users. Still, the market feedback that shapes sustainability disclosure standards
is passed down the value chain when data providers integrate those standards (or one specific
standard) into their products. Data providers often use the information architecture provided by
standards. If, for example, a data aggregator organizes its dataset using the industries, topics and
metrics provided by the SASB Standards (discussed in more detail in Chapter 10), users of that
dataset can compare information accordingly and know that the data is verifiable and produced
using consistent methodologies. At the same time, preparers gain a sense of which company-spe-
cific information is being sourced downstream.
This is not to imply that one approach is better than the other. To compare data preparers to
standard-setters is to compare apples to oranges. The two serve inherently different purposes in
the sustainability information value chain. The organizations developing sustainability disclosure
standards, with their transparency and impartiality, provide disclosure requirements to improve
the comparability, consistency and reliability of sustainability information in the market. For-profit
data aggregators and ratings and analytics providers advance the use of sustainability data
by catering to customer needs, often with specialized, scalable solutions. Limited transparency
among data providers is also not inherently bad. Independent methods allow insights to be gener-
ated independently of the organization producing the information, so reporting companies cannot
‘game’ the system to achieve more favorable ratings down the line. As data aggregation services,
ratings and analytics become increasingly robust and sophisticated, the level of data collection
and value of insights grows. Future developments will also depend on the influence of public policy
and regulation.

5.2.4. ADDITIONAL INFLUENCERS OF SUSTAINABILITY DATA QUALITY

Before delving deeper into the unique roles of standard-setters and regulators, it is first worth
acknowledging a host of additional entities that interact with the sustainability information value
chain and thus influence how sustainability data is produced and consumed in capital markets.

5.2.4.1. Additional producers

Disclosure platforms and reporting software

Software providers and disclosure platforms help companies collect informa-
tion and prepare their reports according to specific standards. Software providers also help

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

standard-setters build digital taxonomies and information validation pathways. It is difficult to

collect and report reliable information without technology-enhanced tools to support version
control and data tracking.

Securities exchanges
Securities exchanges around the world increasingly encourage listed companies to report
sustainability information. Not to be confused with securities commissions (which have regulatory
authority), securities exchanges are often publicly listed companies themselves and set terms
that companies must adhere to in order to maintain listed status. In some cases, as is true for the
Johannesburg Stock Exchange and the King IV Code of Corporate Governance, adherence to
sustainability-related codes is required for companies listing securities on the exchange.
In addition to listing requirements, many securities exchanges offer sustainability disclosure
guidelines for voluntary use by listed companies. For example, Euronext offers the ESG Reporting
Guide for its issuers to use when setting goals and preparing disclosures ‘compatible with limit-
ing the global temperature increase to 1.5°C.’ Notably, this guidance encourages the assessment
and use of standards and frameworks such as the GRI Standards, SASB Standards and the Task
Force on Climate-related Financial Disclosures (TCFD) Recommendations.95 Similarly, the Japan
Exchange Group, Inc., and the Tokyo Stock Exchange provide ESG guidance that offers key
considerations for ESG investing and sustainability disclosure, and references a number of volun-
tary standards and frameworks that companies can leverage to not only meet reporting demands
but also better align reporting with strategy and core audiences.96

Mission-based coalitions and alliances

The ESG market is also influenced by a number of prominent coalitions and alliance orga-
nizations shaping corporate and investor behavior. For companies, organizations such as the
World Business Council for Sustainable Development, We Mean Business and the Climate Group
offer guidance and resources to help businesses around the world implement environmentally
and socially responsible practices. For investors, organizations such as Principles for Responsible
Investment, Climate Action 100+ and the International Corporate Governance Network, among
others, offer parallel resources to investors seeking to uphold responsible investment practices
and integrate sustainability considerations into the investment process. Such coalitions can
support the scalability of sustainability disclosure by articulating shared objectives at the global,
regional or industry level; disseminating information surrounding best practices and collective
progress; and addressing common challenges. Coalitions help build mutual understanding among
the global reporter and investor community of the interrelationships between economic, social and
environmental systems.

Industry associations
Some industry associations, on behalf of their corporate members, have put out disclosure
guidance specific to the industry they represent. For example, the International Petroleum Industry
Environmental Conservation Association provides sustainability disclosure guidance for compa-
nies in the oil and gas industry. Its guidance supports companies in structuring and disclosing

95 Euronext, ESG Reporting Guide, 2022.

96 Japan Exchange Group and Tokyo Stock Exchange, Practical Handbook for ESG Disclosure, 25 May 2020.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

sustainability-related information in conjunction with other oil and gas industry associations.97
Similarly, the Edison Electric Institute, a US industry association for investor-owned electric util-
ities, provides ESG disclosure guidance to association members specifically tailored to electric
utilities.98 Given an industry association’s focus on serving its members, such efforts tend to be
optimized for reporting companies, potentially favoring reporting companies to an extent that
sacrifices usefulness to users.

Target-setting initiatives and certifications

Companies also rely on programs that lend themselves well to target setting and strate-
gic planning, as well as rethinking traditional business practices. For example, Accounting for
Sustainability Project (A4S), B Lab and Science Based Targets encourage companies to rethink
traditional business practices. A4S, an initiative established by the King Charles III, aims to trans-
form traditional processes in finance by introducing and integrating sustainability into the roles of
accounting and other financial professionals. B Lab offers a certification program for companies to
demonstrate how their business serves the needs of stakeholders, not just shareholders, promot-
ing a balance between purpose and profit. Science Based Targets helps companies identify a
path for reducing GHG emissions within a set timeline to meet global emissions reduction targets
established by the Paris Climate Accord, thus helping companies manage future climate risks
and boost the credibility of their emissions-reduction strategy in investor-facing communication.99
This approach is unique in that most target setting seeks to support companies in meeting internal
objectives rather than those that are externally determined. However, companies may choose to
incorporate such targets into investor-focused disclosures to help communicate progress towards
measurable targets.

5.2.4.2. Additional users

Non-governmental organizations
Apart from the organizations that provide disclosure guidance, non-governmental organiza-
tions (NGOs) may monitor corporate behavior, publish independent research and engage with
investors, regulators and companies alike to call attention to pressing environmental and social
problems to mobilize action. Some organizations embrace a ‘name and shame’ approach to shine
a spotlight on poor corporate management of sustainability issues. Others engage in partnerships
to drive responsible business practices or procurement policies.100 With an eye toward major
trends and policy developments, NGOs can be early informants of emerging issues that have
the potential for negative environmental and/or social impacts as well as the potential to disrupt
industries and affect the long-term value of companies.101

Sell-side analysts
Sell-side analysts—those who work for investment brokerage firms, analyze companies or
make buy, sell or hold recommendations on stocks or other securities—can play a significant

97 International Petroleum Industry Environmental Conservation Association, ‘Sustainability Reporting Guidance,’ accessed October 2020.
98 Edison Electric Institute, ‘ESG/Sustainability White Paper,’ November 2018.
99 ciencebasedtargets.org, accessed October 2020.
100 Corinne Damlamian, ‘Corporate-NGO Partnerships for Sustainable Development,’ University of Pennsylvania Scholarly Commons,
May 2006.
101 Robert Blood, ‘How NGOs Are Driving ESG,’ International Investment, 19 September 2019.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

role in investor decision-making. It is increasingly evident that sell-side analysts are integrating
ESG data with traditional financial information in their evaluation of investment opportunities and
recommendations to clients.102 Many companies pay close attention to sell-side research reports
and are taking note of the growing reference to ESG issues by sell-side analysts.

5.3. SUSTAINABILITY DATA’S UNIQUE CHALLENGES

Sustainability information is different from information provided in traditional financial state-
ments in many ways, creating unique challenges for that permeate the information value chain.
Awareness of these challenges can, in particular, help companies better understand how such
information will be used downstream and help investors evaluate any limitations in the data they
have.

5.3.1. DIFFERENT AUDIENCE NEEDS

Today, a wide range of stakeholders are interested in companies’ sustainability reporting,
including, but not limited to, investors. Where financial statements are used almost exclusively by
investors, sustainability reports are often used by members of civil society, employees, NGOs,
surrounding communities and other non-investor audiences. These different audiences have differ-
ent information needs. Therefore, companies are often compelled to consider the needs of a wider
range of stakeholders when making decisions about what sustainability information to provide and
prioritize—adding complex considerations that do not arise when preparing financial statements.
This complexity is rooted, at least in part, in the fact that sustainability reporting was created
not just to increase corporate transparency but also as a public relations tool.103 The first corporate
sustainability reports were not developed to communicate to investors with the goal of procuring
capital. Rather, they were developed to communicate to the public with the goal of enhancing
reputation and achieving competitive advantage. Because sustainability reports were traditionally
not prepared for investor audiences, who rely on quantitative analytics and data platforms more
than marketing-oriented materials, investors often lack confidence in sustainability reports and
experience challenges when using the data these reports contain.104

5.3.2. A BROAD RANGE OF DATA TYPES

Sustainability is diverse and multidisciplinary, spanning a vast range of environmental, social
and governance-focused matters. Therefore, different sustainability matters require different
modes and methods of measurement. Unique challenges associated with quantitative sustain-
ability data can be attributed to:

• variance in units and bases of measurement;

• the wide array of methodologies in use for preparing data;

• the forward-looking nature of much sustainability information; and

• other unique factors.

102 PRI, ‘Sell-Side Research,’ accessed October 2020.

103 McKinsey & Company, ‘McKinsey Global Survey Results, Sustainability’s Strategic Worth,’ 2014.
104 PwC, ‘Sustainability Goes Mainstream: Insights into Investor Views,’ 2014.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

5.3.2.1. Different units and bases of measurement

When it comes to quantifying sustainability-related risks and opportunities, high levels of
variance among companies and regions can impede the comparability of information and/or
increase the effort required by analysts to turn it into comparable information through conver-
sion and normalization. Units of measurement for sustainability topics such as energy, water,
waste, air quality, customer privacy, product safety, labor practices, supply chain manage-
ment, business ethics and many others tend to vary greatly depending on who reports them.
Without standardization and normalization of metrics, investors encounter problems when eval-
uating overall performance, comparing companies and using the information to make decisions.

5.3.2.2. Different methodologies for preparing data

Relatedly, companies often use different methodologies when preparing data. In some cases,
methodologies vary because of different subject-matter expertise required of a particular facet of
sustainability. As a result, investors and non-investor stakeholders find that they must interpret an
incredibly diverse set of data. Where financial accounting relies on the expertise of professionals
within a singular, long-established discipline (accounting), sustainability information relies on the
expertise of professionals across different facets of environmental science, human resources,
finance, executive management and many other areas. As a result, preparing consistent, reliable
sustainability information requires systems of internal control and data collection that encompass
a broader set of information than those in place for the collection and reporting of financial infor-
mation, as well as additional, cross-functional communication.

5.3.2.3. Forward-looking information

Sustainability information tends to be future-oriented. It seeks to understand future outcomes
of present actions over the short, medium and long term. Although the preparation of sustainability
disclosures and financial statements is unique in many ways, one way they are similar (but usually
assumed to be different) is in the use of estimates and assumptions.
Financial statements rely on a wide range of estimates and assumptions without undermin-
ing confidence in the information or its usefulness. For example, depreciation calculations rely
on assumptions regarding the salvage value of assets and the length of the assets’ useful life.
Companies may apply average cost flow assumptions when calculating inventory and the cost of
goods sold—a method that relies on sold-item averages and estimates of supply and demand.
Sustainability-related financial disclosure requires a similar, and sometimes greater, level of
assumption and estimation (more on this in Section 9.5.1.). The use of estimates and assump-
tions, when done well, does not undermine the reliability or usefulness of sustainability information.
An awareness of the challenges that exist in sustainability data can support professionals in
being more competent consumers of that data because, as will be discussed further in Chapter
14, these challenges can trickle down the value chain. Indeed, because of these data-related
challenges, some believe sustainability disclosure cannot be as robust as financial disclosure.
However, recent history shows that financial accounting was not always as consistent, comparable
and reliable as it is today. Developing robust measurement and reporting processes takes time
and global cooperation. While progress is needed to enhance the accuracy and usefulness of
sustainability information, one does well to remember that financial accounting, too, grappled with
a lack of standardization for many years before the variability of reporting practices was deliber-
ately addressed through the development of international accounting standards, contributing to
the bedrock of information that underpins capital markets today.
COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 53
FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
5 RECOGNIZE the roles of the organizations that make up the sustainability
information value chain.

? CHECK YOUR UNDERSTANDING

1. What role do data providers play in the sustainability disclosure value chain?

2. What unique challenges exist related to sustainability data?

JUMP TO ANSWERS

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 54

FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

6
THE ROLE OF STANDARDS
AND FRAMEWORKS:
FROM FRAGMENTATION
TO COHESION IN
SUSTAINABILITY
DISCLOSURE
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:
3 IDENTIFY how sustainability disclosure has evolved and why it is an important
component of general purpose financial reporting.

5 RECOGNIZE the roles of the organizations that make up the sustainability

information value chain.

6.1. THE ROLE OF STANDARD-SETTERS

Organizations that develop sustainability disclosure standards exist to enable companies to
consistently disclose sustainability information, facilitating better decision-making and transpar-
ency in the global business community. Standards underpin all information in the sustainability
information value chain, providing the critical information infrastructure that directly shapes what
companies report and how that information is used downstream. As mentioned in Section 5.2.3.,
standard-setters are typically non-governmental, non-profit organizations. They are accountable
to the public, operate with a high degree of transparency and employ processes that balance the
needs of information producers and users.
Historically, those who develop sustainability disclosure standards and frameworks have done
so with the expectation of voluntary adoption, where a given standard or framework serves as
a source of guidance that companies can choose to fully or partially follow, or ignore it entirely.
However, as will be discussed in more detail in Chapter 8, global markets are shifting toward
mandatory adoption, where a specific sustainability disclosure standard constitutes a set of
requirements preparers must follow.
The maturation of the sustainability disclosure ecosystem has been characterized by an influx
of many different standards and frameworks for corporate reporting, many of which were devel-
oped to meet different stakeholder needs, serve different industries, address different issues and,
in some cases, serve specific regions.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

6.2. FORMATIVE STANDARDS AND FRAMEWORKS

Of the standards and frameworks that have been developed over the years to support
voluntary disclosure of sustainability information, several have been instrumental in shaping
sustainability-related financial disclosure as it exists today across capital markets. Ultimately,
these standards and frameworks have helped provide structure to non-monetary information
and support to companies’ ability to communicate to certain audiences. Some were designed to
support investor-focused communication, while others were not.

• The Global Reporting Initiative (GRI) was launched in 1997 to develop standards for
companies to report their impacts on the economy, environment and surrounding society,
including impacts on human rights. GRI Standards support communication to a range of
stakeholders.105

• The CDP (formerly the Carbon Disclosure Project) was launched in 2000 to collect and
disseminate information about the GHG emissions of major corporations for a range of
stakeholders. Today, the CDP Questionnaires supports companies, cities, states and
regions in measuring and managing environmental risks and opportunities, including those
related to climate change, water security, forestry management and other issues.106

• The Climate Disclosure Standards Board (CDSB) was launched in 2007 to develop
a framework for climate-related financial disclosure suited for investor use. The CDSB
Framework for Reporting Environmental and Climate Change Information (CDSB
Framework) encourages standardization of environmental reporting processes and helps
investors, analysts, companies, regulators, stock exchanges and accounting firms consider
the impacts of natural capital on corporate performance alongside financial capital.107

• The International Integrated Reporting Council (IIRC) was launched in 2010 to develop a
framework that brings together financial and non-financial information, allowing companies
to communicate a holistic view of company performance to investors. Specifically, its
Integrated Reporting Framework recognizes six capitals—financial, manufactured,
intellectual, human, social and relationship, and natural—and aims to support companies
in understanding and communicating the interdependencies of these capitals through a
cycle of integrated thinking and reporting.108

• The Sustainability Accounting Standards Board (SASB) was launched in 2011 to

develop industry-specific disclosure standards for investor-focused information. SASB
Standards support disclosure of those environmental, social and governance topics likely
to be relevant to the financial performance of companies in a given industry, as well as
associated metrics. (The SASB Standards will be discussed further in Chapters 10 and 11).

105 GRI Standards, Consolidated Set of GRI Sustainability Reporting Standards, 2020.
106 CDP.net, accessed October 2020.
107 CDSB Framework for Reporting Environmental and Climate Change Information, December 2019.
108 International Integrated Reporting Framework, January 2021.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

• The Task Force on Climate-related Financial Disclosures (TCFD) was launched in

2015 by the Financial Stability Board (FSB) to develop recommendations for disclosing
climate-related financial risks and opportunities to investors. The TCFD recommendations
address climate risk in financial filings or other reports by disclosing information related
to governance, strategy, risk management, and metrics and targets, with a strong focus
on risks and opportunities related to the transition to a low-carbon economy.109 (The TCFD
Recommendations will be discussed further in Chapters 10 and 11).

• The Task Force on Nature-related Financial Disclosures (TNFD) was founded in 2021
by the United Nations Environment Programme Finance Initiative (UNEP FI), United Nations
Development Programme (UNDP), the World Wildlife Fund (WWF) and Global Canopy to
provide financial institutions and corporations with a complete picture of their environmental
risks and opportunities. At the time this chapter was written, the TNFD was in the process
of developing a framework for risk and opportunity management and disclosure that builds
on and feeds into the existing disclosure standards and frameworks mentioned here.110

6.3. D
 ISTINGUISHING CHARACTERISTICS OF
SUSTAINABILITY DISCLOSURE GUIDANCE
Of the above organizations, some have provided disclosure frameworks, while others have
provided disclosure standards. Though colloquially the terms are often used interchangeably,
‘frameworks’ and ‘standards’ serve unique but complementary purposes. Understanding their
original purpose helps explain the structure of the IFRS Sustainability Disclosure Standards as
they exist today.
Frameworks are a set of concepts and principles for how information is structured and
prepared, as well as what broad topics are covered. Sustainability frameworks such as the TCFD
recommendations, the CDSB Framework and the Integrated Reporting Framework establish useful
conceptual schema for communicating the sustainability-related risks and opportunities faced
by a business. Generally, frameworks help promote consistency of information, both between
reporting entities and over time. Frameworks enable high-quality disclosure because they provide
detailed guidance for preparing information related to governance, risk and strategy, which helps
companies report sustainability information with the same rigor as they do financial information.
For example, the TCFD recommendations outline the broad topics of ‘strategy’ and ‘metrics
and targets’ in financial disclosure. Under the principle of ‘strategy,’ the TCFD recommends that
companies provide a ‘discussion of how climate-related risks and opportunities are integrated into
a company’s current decision-making and strategy formulation.’ Under the principle of ‘metrics
and targets,’ the TCFD recommends that companies provide ‘metrics related to company scenario
analysis and strategic planning process, including those related to GHG emissions, energy, water,
land use, and investments in climate adaptation and mitigation.’111 The TCFD additionally provides
guidance on how to implement these recommendations in mainstream annual financial filings.112

109 TCFD, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures, June 2017.
110 Tnfd.global, accessed June 2023.
111 TCFD, Final Report: Recommendations of the Task Force.
112 TCFD, ‘TCFD Recommendations Annex: Implementing the Recommendations of the TCFD,’ June 2017.

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Standards are a set of specific, replicable and detailed guidance for what topics and metrics
should be disclosed. Standards such as those issued by the SASB and GRI make frameworks
actionable. Where frameworks enable high-quality disclosure due to guidance on how to prepare
information, the specificity of standards enables apples-to-apples comparison among reporting
companies. Standards can also help yield information that can be assured by an independent
third party.
For example, some companies have used the SASB Standards to help move the TCFD recom-
mendations from principles to practice. Using the industry-specific example of the SASB Standard
for the Oil & Gas—Exploration and Production industry, the Standard supports disclosures on
‘strategy’—one of the TCFD recommendations—using two qualitative metrics: ‘discussion of
long-term and short-term strategy to plan to manage Scope 1 emissions’ and ‘discussion of how
demand for hydrocarbons and/or climate regulation influence the capital expenditure strategy (of
a company in that industry).’113 Metrics disclosed via SASB Standards can support more compa-
rable disclosure aligned with the TCFD recommendations than if companies reported on their
sustainability strategy in a more free-form way, as the TCFD recommendations can at times offer
broad flexibility in implementation.
While standards focus on identifying what should be disclosed, standards also allow a degree
of flexibility for companies to identify the sustainability issues most appropriate for their business
and then use the relevant standardized metrics to measure those issues.

6.3.1. INDUSTRY-AGNOSTIC OR INDUSTRY-SPECIFIC

Industry-agnostic or ‘cross-industry’ disclosure guidance provides reporting criteria that
can be ubiquitously applied by any company, regardless of the industry in which it operates.
Frameworks, such as those originally created by the CDSB and IIRC, are nearly always indus-
try-agnostic. To provide an example, the principle of ‘connectivity of information’ outlined by the
Integrated Reporting Framework states that ‘an integrated report should show a holistic picture of
the combination, interrelatedness and dependencies between the factors that affect the organiza-
tion’s ability to create value over time.’ While companies in different industries (and indeed, different
companies in the same industry) will apply this principle in slightly different ways, companies’ abil-
ity to apply it does not change from industry to industry. In this way, industry-agnostic guidance
can enhance the type and structure of disclosures without being highly detailed or prescriptive.
Industry-specific disclosure guidance establishes criteria that are relevant to companies
in a specific industry. Companies with different business models and operating environments
often face different sustainability-related risks and opportunities. For example, the issue of climate
change manifests quite differently across industries. Where a completely industry-agnostic
approach to climate disclosure might yield information that is broadly applicable but not entirely
relevant to a given company or overlook climate-related information that is important to a small set
of companies, an industry-specific approach can help ensure companies disclose climate infor-
mation relevant to their business model and operating context.
Consider climate change and its impacts on meat, poultry and dairy producers compared with
those on automobile manufacturers. Meat, poultry and dairy producers generate significant direct
emissions from their operations from both livestock and energy-intensive industrial processes. It is

113 SASB Standard, Oil & Gas—Production & Exploration.

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therefore useful for those companies to disclose gross global Scope 1 GHG emissions. However,
the vast majority of GHG emissions associated with the automobiles industry occur while they
are being driven rather than during the manufacturing process. Information about the vehicle fuel
economy can provide more useful insight for assessing climate risk or opportunity associated with
auto manufacturers.
It is helpful to frame industry agnosticism and industry specificity as dichotomous to under-
stand the different levels of information standards and frameworks provide to the market. In
reality, though, many standards and frameworks have characteristics of both. For example, GRI
Standards are largely industry-agnostic. They were originally designed to be universally applied,
where companies select the topic-specific GRI Standards most applicable to their business.
However, the emerging GRI Sector Program aims to develop sector-specific standards, recog-
nizing that specific sectors have different impacts on the economy, environment and society.114
The CDP Questionnaires are similarly industry-agnostic but include sector-specific supplements
based on industry considerations. Indeed, to achieve broad-based comparability and relevance
without overburdening preparers, disclosure standards need to balance both.
Table 2—Comparing sustainability disclosure frameworks and standards pre-ISSB consolidation

CDP CDSB GRI IIRC SASB TCFD TNFD

Target All All
Investors Investors Investors Investors Investors
audience stakeholders stakeholders
Standard or De facto
Framework Standard Framework Standard Framework Framework
framework standard*
Industry-
Industry- Industry-
Industry- agnostic
agnostic agnostic
agnostic or Industry- with Industry- Industry- Industry-
with indus- with indus-
industry- agnostic emerging agnostic specific specific
try-specific try-supple-
specific industry-
supplements ments
specific
*The CDP Questionnaires act as a de facto standard for climate, water and forests.

6.3.2. GROWING RATES OF ADOPTION, AND GROWING CONFUSION

Since their launch, these early standards and frameworks have achieved significant rates of
adoption. Though not a comprehensive tally, Figure 6 generally indicates rates of adoption by
measuring the percentage of companies listed on the Euronext 100 (N100) and Fortune G250
(G250) to use the GRI Standards, SASB Standards and TCFD Recommendations within their
annual financial reports in 2022.

114 Globalreporting.org, ‘Sector Program,’ accessed October 2020.

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Figure 6—2022 adoption rates of GRI Standards, SASB Standards and TCFD Recommendations

Source: KPMG International, ‘Big Shifts, Small Steps: Survey of Sustainability Reporting 2022,’: October 2022.

Each of these disclosure standards and frameworks was developed primarily for companies
seeking to voluntarily disclose sustainability information. However, as investor demand for infor-
mation increased, regulators, stock exchanges and policymakers started to consider allowing,
recommending or even requiring reporting with specific sustainability disclosure standards and
frameworks, further stimulating adoption in some regions.
For example, in 2021 the TCFD reported support from more than 120 regulators and govern-
ment entities, with eight jurisdictions (Brazil, the EU, Hong Kong, Japan, New Zealand, Singapore,
Switzerland and the UK) having announced requirements to report in alignment with the TCFD
Recommendations that year.115 However, even widespread support can only go so far in improv-
ing the quality of sustainability information available to markets. As Figure 6 illustrates, companies
across different regions adhere to the recommendations to various degrees, resulting in incon-
sistent reporting.
Indeed, as various sustainability disclosure standards grew in popularity, so did market confu-
sion. The maturation of the sustainability disclosure ecosystem has been encouraging with respect
to the progress that has been made, yet increasingly fragmented and difficult to navigate. All too
often, market participants describe the ecosystem of sustainability disclosure as an amorphous
‘alphabet soup,’ where a large number of standards and frameworks providers—each with its own
abbreviation—disjointedly work toward their own overlapping but individual goals. As a result,
companies are left to fend for themselves when deciding what standards to use for disclosure, and
the challenges that plague capital markets—an abundance of immaterial information, inconsistent
units of measure, low investor confidence and so on—remain largely unsolved.

115 TCFD, ‘2021 Status Report,’ October 2021, p. 4.

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Figure 7—TCFD-aligned regulation

Source: MSCI, ‘As TCFD Comes of Age, Regulators Take a Varied Approach,’ 21 April 2022.

6.4. C
 REATING A COHERENT SYSTEM FOR
COMPREHENSIVE REPORTING –
SIMPLIFICATION THROUGH CONSOLIDATION
In response to widespread confusion and the market threats posed by increasing global
fragmentation, companies, investors and other key stakeholders expressed their demand for a
simplified system of investor-focused sustainability disclosure. Seeking to address this urgent
need and define a path forward, two major events took place concurrently in September 2020:
1. The CDP, CDSB, GRI, IIRC and SASB published a joint ‘Statement of Intent to Work
Together Towards Comprehensive Corporate Reporting.’ The statement described a
collective view of how each organization’s standards and/or frameworks align with the
others’, provided a joint vision for the development of a comprehensive corporate reporting
system and stated a commitment to work together to provide joint market guidance. Among
other useful contributions, this paper outlined a ‘big picture’ relationship between their
standards and frameworks:116
2. The Trustees of the IFRS Foundation released and invited public comment on the
‘Consultation Paper on Sustainability Reporting,’ to gather feedback on the need for
consistency in reporting and the potential creation of a new international sustainability
standards board under the governance of the IFRS Foundation (among other related

116 ‘Statement of Intent to Work Together Towards Comprehensive Corporate Reporting Summary of Alignment Discussions among
Leading Sustainability and Integrated Reporting Standards Organisations CDP, CDSB, GRI, IIRC, and SASB,’ August 2020.

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Figure 8—Aligning frameworks and standards for comprehensive reporting

Source: Derived from “Statement of Intent to

Work Together Towards Comprehensive Corporate Reporting,” CDP, CDSB, GRI, IIRC, and SASB, 2020.

consultation objectives). The consultation received 577 responses from the policy and
regulatory community, the accounting community, the ESG community, individuals and
other market participants expressing widespread support for the IFRS Foundation to play
a role in global sustainability reporting. As a result, the IFRS Foundation Trustees initiated
steps to formalize the creation of a new board and began to define its strategic direction.117
These two events laid the groundwork for a period of consolidation. By zooming out and iden-
tifying existing complementarities among sustainability disclosure standards and frameworks,
and by listening to the market, the organizations providing the leading sources of guidance for
investor-focused sustainability reporting, along with the global leader in financial accounting stan-
dards, determined that the best way to solve the problems caused by fragmented sustainability
disclosure was to bring investor-focused sustainability disclosure standards and frameworks under
one roof.
In 2021, the IIRC and SASB merged to form the Value Reporting Foundation (VRF). Then, less
than a year later at the UN Climate Change Conference in Glasgow, COP26, it was announced
that the IFRS Foundation would form the new International Sustainability Standards Board (ISSB)
‘to develop—in the public interest—a comprehensive global baseline of high-quality sustainability
disclosure standards to meet investors’ information needs.’ To do so, the ISSB would:
1. consolidate the CDSB and the VRF into the new board; and
2. publish prototype standards developed by the Technical Readiness Working Group (TRWG),
consisting of representatives from the CDSB, IASB, TCFD, VRF and World Economic Forum

117 IFRS Foundation, ‘IFRS Foundation Trustees’ Feedback Statement on the Consultation on Sustainability Reporting,’ April 2021.

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A closer look: supporting comments

The quotes below provide a small sample of the comments received in support of the IFRS
Foundation’s ‘Consultation Paper on Sustainability Reporting.’

‘IOSCO sees an urgent need to improve the consistency, comparability, and reliability of
sustainability reporting, with an initial focus on climate change-related risks and opportuni-
ties, which would subsequently be broadened to other sustainability issues ... The IOSCO
Board is committed to working with the IFRS Foundation Trustees and other stakeholders to
advance these priorities.’ —International Organization of Securities Commissions

‘There remains a current need for a single global solution for consistent and comparable
sustainability reporting. The IFRS Foundation is best placed to deliver this solution by
being the clear choice for sustainability reporting to jurisdictions for filing or reporting
purposes.’ —Institute of Singapore Chartered Accountants

‘The IFRS Foundation should have a leading role in identifying and governing these stan-
dards. We encourage the IFRS Foundation to leverage and build on the work by the [World
Economic International Business Council] WEF IBC…and to work closely with GRI, IIRC,
TCFD and SASB—with a shared common and non-competitive interest.’ —Unilever pl

‘BlackRock strongly agrees that there is a need for a global set of internationally recognized
sustainability reporting standards. We believe the IFRS Foundation has a central role to play
in setting such standards, given its domain expertise and the relationships it has with public
policy makers and market regulators, which are essential to establishing a credible report-
ing system that achieves global recognition and adoption.’ —BlackRock, Inc.

(WEF) and supported by International Organization of Securities Commissions IOSCO.118

Thus, the ISSB was established to transform varied standards, frameworks and recommenda-
tions for sustainability reporting into high-quality sustainability disclosure standards that provide
a comprehensive, consistent baseline of information to global financial markets.
Figure 9—IFRS Sustainability Disclosure Standards build on investor-focused standards and
frameworks

118 IFRS Foundation, ‘IFRS Foundation Announces International Sustainability Standards Boards, Consolidated with CDSB and VRF, and
Publication of Prototype Disclosure Requirements,’ November 2021.

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6.4.1. A FAMILIAR PATTERN

The evolution of sustainability reporting mirrors the history of financial reporting in many ways.
Today, financial markets are underpinned by consistent, globally accepted accounting standards.
However, as discussed in Chapter 2, it was not always this way. What began as an uncoordinated
effort to establish consistent reporting practices in different countries became, through intentional
collaboration and the establishment of a representative international standards board, a global
system of consistent financial reporting across country lines. Indeed, this history shows us that
the challenges posed by market fragmentation are not insurmountable.
When the International Accounting Standards Committee (IASB) was founded in the early
2000s to address fragmented financial information for capital markets, it established several prac-
tices crucial to achieving widespread adoption, including:

• a globally representative governance structure;

• globally representative consultative groups and processes for gathering market input to
inform standard-setting;

• robust and inclusive due process to consider the views of preparers, users, assurance
providers and others to develop globally applicable and high-quality standards; and

• a model for engaging global market regulators.

The ISSB was founded years later to achieve the same goal for sustainability information, and
it benefits from the IASB’s robust and inclusive structures and processes. Today, the IASB and
ISSB operate as sister boards under the IFRS Foundation.

Figure 10—IFRS Foundation sister boards

In today’s complex business ecosystem, sustainability disclosure standards, akin to their finan-
cial disclosure counterparts, exist to fulfill a fundamental need for transparency and accountability.
Just as financial disclosure standards are designed to safeguard the interests of the investing
public by ensuring accurate and reliable financial information, the IFRS Sustainability Disclosure
Standards serve the same purpose by ensuring accurate and reliable sustainability information
on those matters that affect financial performance. The concepts that underpin today’s global

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disclosure rules—including a focus on decision-useful information and materiality, are embedded

in the IFRS Sustainability Disclosure Standards as well. However, as discussed in Chapter 5, the
practice of sustainability reporting grew outside the realm of investor-focused reporting for many
years. Consequently, different definitions of ‘materiality’ have emerged to accommodate the infor-
mation needs of non-investor stakeholders.

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
3 IDENTIFY how sustainability disclosure has evolved and why it is an important
component of general purpose financial reporting.

5 RECOGNIZE the roles of the organizations that make up the sustainability

information value chain..

? CHECK YOUR UNDERSTANDING

1. In the sustainability information value chain, what role do standard-setters play?

2. Describe the four distinguishing characteristics of sustainability disclosure guidance.

3. What two main events contributed to the formation of the ISSB?

4. What resources do the IFRS Sustainability Disclosure Standards build from?

JUMP TO ANSWERS

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MATERIALITY:
GOING BEYOND
INVESTORS
7
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:
4 DISTINGUISH how ‘materiality’ is defined and used globally in the context of
reporting

7.1. M
 ATERIALITY APPLIED TO
SUSTAINABILITY DISCLOSURE
As learned in Chapter 3, the concept of materiality in securities law and financial accounting is
linked to investor decision-making. Since the widespread adoption of mandated financial reporting
(and as just learned in Chapter 6), calls for the disclosure of sustainability information have since
increased, and the reporting landscape has significantly evolved. Many different organizations
developed sustainability disclosure standards and frameworks not only to meet the information
needs of investors, but also for other purposes and stakeholders.
Those organizations that have not focused on investors as the primary users of reports have
redefined materiality for use in different contexts. In the context of sustainability, the term is often
used to more broadly refer to the sustainability matters that affect the decisions or even the wellbe-
ing of any of a company’s key stakeholders. As a result, those preparing and using sustainability
disclosures will find that some forms of sustainability disclosure guidance rely on the same defi-
nition of investor-focused materiality while others provide a new view.
This is a unique aspect of sustainability disclosure. A typical company follows just one set
of financial accounting standards unless it is cross-listed in multiple jurisdictions, in which case
it may have to prepare a second set of financial statements according to different requirements.
The use of multiple standards for financial accounting is the exception, not the norm. When it
comes to sustainability disclosure, the opposite tends to be true. The use of multiple standards to
prepare sustainability disclosure is common practice. While significant strides have been made to
simplify and align investor-focused sustainability disclosure guidance (see Section 6.4.), compa-
nies continue to voluntarily use a variety of standards with different criterial for identifying material
information when their reporting goals expand beyond investor audiences.
Today, materiality in the context of sustainability disclosure generally falls into one of three
significant approaches. To understand each, it is useful to explore the definitions adopted by
three major organizations shaping sustainability reporting. The first, adopted by the International
Sustainability Standards Board (ISSB), is the same as that used by the International Accounting
Standards Board (IASB) and thereby aligns closely with the traditional view of materiality as it has

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been used in securities law and regulation. The second, adopted by the Global Reporting Initiative
(GRI), focuses on companies’ impacts and constitutes a meaningful shift away from materiality as
it has been traditionally defined. The third, adopted by the European Financial Reporting Advisory
Group (EFRAG), combines both approaches.

7.2. M
 ATERIALITY IN THE IFRS SUSTAINABILITY
DISCLOSURE STANDARDS
The ISSB defines ‘materiality’ in the following way:
In the context of sustainability-related financial disclosures, information is material
if omitting, misstating or obscuring that information could reasonably be expected
to influence decisions that primary users of general purpose financial reports make
on the basis of those reports, which include financial statements and sustainability-
related financial disclosures and provide information about a specific reporting entity.119
Materiality is an entity-specific aspect of relevance based on the nature or magnitude,
or both, of the items to which the information relates, in the context of the entity’s
sustainability-related financial disclosures.120
In adopting the IASB’s definition, the ISSB’s approach to materiality embodies the same
concepts foundational to investor-focused reporting (recall Chapter 3). Sometimes referred to
as ‘financial’ materiality, it serves the same primary users (investors, lenders and creditors that
make decisions about whether to provide resources to a company), focuses on meeting the
common information needs of those users and relies on the concept of omissions, misstatements
and obscurement. Just as with financial information, material sustainability information can be
qualitative or quantitative. Quantitative information may be expressed using monetary values or
non-monetary metrics.
In this sense, the criteria used to determine if sustainability information is material is the same
as the criteria used to determine if information in financial statements is material: Is the informa-
tion reasonably likely to influence investor decisions? Investors can therefore be confident that
information produced using the IFRS Sustainability Disclosure Standards can help inform their
understanding of the financial position, performance and prospects of the company.

7.2.1. M
 ATERIALITY CONSIDERATIONS UNIQUE TO SUSTAINABILITY-RELATED
FINANCIAL DISCLOSURE
While the view of materiality adopted by the IASB and ISSB is the same, it is important to
recognize that sustainability-related financial information is, in nature, different from the information
provided in financial statements. Therefore, materiality applied to investor-focused sustainability
disclosure requires a couple of unique considerations. For one, sustainability-related financial
disclosures should present all the risks and opportunities that could reasonably affect a company’s
prospects. To disclose material information related to all the risks and opportunities that affect a
company, preparers must exercise an additional level of judgment.

7.2.1.1. M
 ateriality judgements applied in the context of sustainability-related
financial disclosures
Recall from Section 3.2. that preparers make materiality judgments in the context of a set of
reporting requirements. When preparing disclosure according to the IFRS Accounting Standards,
this means making materiality judgments in the context of the set of information required by those

119 IFRS Foundation, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, paragraph 18, June 2023.
120 IFRS Foundation, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, paragraph 18, June 2023.
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Standards—that is, the financial statements and notes that accompany those statements. Of course,
investors often use other, public information (such as industry forecasts, news media and other
sources) when making investment decisions. However, preparers do not make materiality judgements
on the basis of that other information. Rather, they are primarily responsible for producing information
that is related to the company’s business activities and operations (i.e., that which is ‘entity-specific’).
Indeed, the IASB specifies that companies are obligated to consider the affect a piece of information
could reasonably have the decisions investors make on the basis of financial statements.
When preparing disclosure according to the IFRS Sustainability Disclosure Standards, this
means making materiality judgments in the context of the set of information required by those
Standards—that is, sustainability-related financial disclosures. The ISSB specifies that companies
are obligated to consider the affect a piece of information could reasonably have on the decisions
investors make on the basis of general purpose financial reports. It further acknowledges that
financial reports include both financial statements and sustainability-related financial disclosures.
Specifically, sustainability-related financial disclosures are:
A particular form of general purpose financial reports that provide information about
the reporting entity’s sustainability related risks and opportunities that could reason-
ably be expected to affect the entity’s cash flows, its access to finance or cost of
capital over the short, medium or long term, including information about the entity’s
governance, strategy and risk management in relation to those risks and opportu-
nities, and related metrics and targets.121
In other words, sustainability-related financial disclosure requires preparers to provide material
information related to the sustainability-related risks and opportunities that affect the financial posi-
tion, performance and prospects of the company. When considering if sustainability information is
material, preparers consider not only if that information is accurate, but also if it could reasonably
influence investor decisions in the context of all the sustainability information provided. As a result,
the IFRS Sustainability Disclosure Standards help companies produce a more complete set of the
company-specific sustainability information relevant to investors when deciding to buy shares, offer
loans or otherwise provide capital to the company.
By applying the same criteria for determining materiality to sustainability-related financial
information, investors can expect disclosures prepared using the IFRS Sustainability Disclosure
Standards to contain sustainability information that is designed to help investors make assess-
ments about companies’ financial position, financial performance and prospects.

7.2.1.2. Identifying sustainability-related risks and opportunities

Though the criteria are the same for determining if financial and sustainability-related informa-
tion is material, the process is slightly different. Not all sustainability-related risks and opportunities
apply to every company. They vary based on industry, operating model, location and other factors.
Before a preparer can determine which sustainability information is material, it must first filter down
the universe of possible sustainability-related risks and opportunities to those that could reason-
ably be expected to affect its cash flows and its access to finance or cost of capital over the short,
medium or long term. Identifying material information for sustainability-related financial disclosure
therefore requires two steps:

121 IFRS Foundation, IFRS S1, Appendix A.

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1. identify relevant risks and opportunities; and

2. identify and disclose the material information related to those risks and opportunities.
This is notably different from preparing financial statements, where preparers do not decide
which reporting categories to include. Financial accounting standards define the reporting cate-
gories (such as assets, liabilities, equity, revenue and expenses), which apply to all companies
regardless of their industry, operating model or location.
Consider the following two examples:
Example 1: Financial statements
Company A, an Appliance Manufacturing company that recently acquired some new office
equipment, is determining its disclosure obligations according to the IFRS Accounting Standards,
which require companies to include value of property, plant and equipment (PP&E) in its statement
of financial position. Specifically, the Standards require companies to recognize the cash outlay
of new physical assets on its balance sheet and depreciate the asset’s value over the course of
its useful life (a process called capitalization) rather than recognizing it as an expense at the time
it was purchased. However, assets can be a wide range of things (ranging from office appliances
to major manufacturing components to entire properties and beyond) and it is not always cost
effective for preparers to capitalize and depreciate every asset, as it is more labor intensive than
simply recording an expense. To determine its disclosure obligations, Company A considers if
the information provided by capitalizing the asset is reasonably likely to influence investor deci-
sions. It could determine that, given the relative value of the asset, its useful life and associated
future economic benefits, the information is not reasonably likely to influence investor decisions,
and therefore could choose to recognize the purchases under a certain amount as an expense.
So, while preparers do not have the discretion to decide to include disclosures related to assets,
it does have the discretion to design reasonable accounting policies that it believes do not result
in a material departure from what would be reported if the standards were being followed more
precisely.
Example 2: Sustainability-related financial disclosures
Company B, an E-Commerce company, is determining what aspects of its operations are
most exposed to transition risk. As an E-Commerce company, it may determine that a significant
portion of the value it generates comes from its ability to distribute products efficiently and cost-ef-
fectively to customers. It may also believe that rising fuel costs and exposure to emissions-limiting
regulation (such as carbon border adjustment mechanisms) could affect distribution costs, which
could then have significant implications given the company’s narrow profit margins. Under such
circumstances, it may conclude that the carbon footprint associated with its product packaging
and distribution constitute a sustainability-related risk or opportunity that could reasonably be
expected to affect its prospects (Step 1). In fact, the SASB Standards include that as a disclosure
topic in the E-Commerce industry standard. Company B must then determine which emissions
information related to product packaging and distribution, if omitted, misstated or obscured, is
reasonably likely to influence investor decisions (Step 2).
For all disclosures—financial and sustainability-related—materiality judgments apply to
specific pieces of information. However, because not all sustainability-related risks and oppor-
tunities apply to all companies, preparers must exercise additional judgment to determine which
risks and opportunities to include in its sustainability-related financial disclosures.

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7.2.2. STANDARDS BUILT ON A COMMON DEFINITION

Though investor-focused materiality is included in IFRS Sustainability Disclosure Standards,
which were first published in 2023, it is important to recognize that for many preparers and inves-
tors, it is not completely new. One will notice in Sections 6.2. and 6.4. that the organizations that
developed voluntary sustainability disclosure guidance with a focus on investor use are those
that have been formative in creating the IFRS Sustainability Disclosure Standards. In addition to
the IASB Accounting Standards, the IFRS Sustainability Disclosure Standards were designed
using the TCFD Recommendations and the materials of the CDSB and the SASB. Each of these
resources shared a common view on materiality; they all focused on reporting information that is
useful to investors’ understanding of company financial performance and prospects. As a result,
companies that have previously reported using these standards and frameworks are familiar with
the concept and, in many cases, have already developed the necessary processes to report
material sustainability information to investors.

7.3. MATERIALITY IN THE GRI STANDARDS

The GRI Standards, which are designed to support sustainability reporting, approach mate-
riality in a different way. When compared with investor-focused materiality, the GRI approach to
materiality is characterized by two main distinctions:
1. It is impact focused; and
2. It is inclusive of stakeholders.

7.3.2. IMPACT FOCUSED

The GRI Standards prompt companies to identify and disclose ‘material topics’ and defines
material topics as ‘topics that represent an organization’s most significant impacts on the economy,
environment, and people, including impacts on their human rights.’122 As with other standards, the
GRI Standards provide guidance in the form of topics that are likely to be material, including topics
such as GHG emissions, water and effluents, economic inclusion, and anti-competitive behavior,
among others.
More specifically, the GRI Standards prompt a company to identify the positive or negative
impacts it ‘causes,’ ‘contributes to,’ or is ‘directly linked to’ through its ‘activities’ and ‘business
relationships.’ Here, materiality is a matter of considering the ‘severity of an impact’ and ‘likelihood’
it will occur. For instance: ‘An example of a positive impact is an organization adopting measures
that lower the cost of renewable energy for customers, thereby allowing more customers to switch
from using non-renewable energy to renewable energy, and thus contributing to mitigating climate
change.’123 As stated in GRI 3: Material Topics 2021, ‘The significance of an impact is the sole
criterion to determine whether a topic is material for reporting.’ Indeed, for this reason many refer
to this as impact materiality.

122 GRI Standards, GRI 3: Materials Topics 2021, p. 4.

123 GRI Standards, ‘GRI 3: Materials Topics 2021, pp. 11-12.

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7.3.3. INCLUSIVE OF STAKEHOLDERS

The GRI approach to materiality goes beyond considering how specific information would
affect the decisions of report users. The GRI Standards state that stakeholders, including but not
limited to investors, should be considered and engaged to help companies identify their material
impacts. They elaborate that ‘common categories of stakeholders for organizations are busi-
ness partners, civil society organizations, consumers, customers, employees and other workers,
governments, local communities, non-governmental organizations, shareholders and other inves-
tors, suppliers, trade unions, and vulnerable groups.’124 In applying the GRI Standards, materiality
is not a matter of whether information related to impacts is connected to a company’s financial
position and performance, nor is it a matter of assessing the usefulness of the information for a
particular audience (though preparers may certainly take that into account). Rather, key stakehold-
ers are engaged to identify and capture the company’s external impacts.
In considering GRI’s focus on impact and the role of stakeholders in the process of deter-
mining materiality, one may notice that, like the ISSB’s process, it requires companies to identify
what topics to disclose. The ISSB refers to required disclosures as sustainability-related risks and
opportunities, which are chosen for their relationship to a company’s financial prospects. Material
information related to each risk and opportunity is selected if it is reasonably likely that informa-
tion will influence investor decisions. GRI refers to its disclosures as ‘topics, ‘which are chosen by
preparers for their material positive or negative impact on stakeholders. The term ‘materiality’ is
used by both standards to describe the judgment that companies apply when determining what
sustainability information to disclose, but it means two very different things.
For many years, some viewed the idea of impact materiality to be in competition with inves-
tor-focused materiality. Today, these two schools of thought can be viewed as interrelated, but not
identical. Where investors want to understand how a company’s management of sustainability-re-
lated risks and opportunities affects the prospects of that company, investor-focused or ‘financial’
materiality offers a means to do so. Of course, the implications for investors is not independent
of how other stakeholders view or are impacted by the company, but they aren’t the same either.
Where other stakeholders, including some investors, want information about how a company’s
activities benefit or harm its external environment, impact materiality offers a means to do so.
Because, again, the two concepts are interrelated, but not identical.

7.4. M
 ATERIALITY IN THE EUROPEAN SUSTAINABILITY
REPORTING STANDARDS
Today, both approaches to materiality have been adopted by the EFRAG and serves as the
criteria applied by companies to ‘identify the material impacts, risks, and opportunities to be
reported [emphasis added]’ under the European Sustainability Reporting Standards (ESRS).
The ESRS 1 General Requirements states:
A sustainability matter is material from an impact perspective when it pertains to the
undertaking’s material actual or potential, positive or negative impacts on people or
the environment over the short-, medium- or long-term…

124 GRI Standards, ‘GRI 3: Materials Topics 2021,’ p. 9.

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The scope of financial materiality for sustainability reporting is an expansion of the

scope of materiality used in the process of determining which information should
be included in the undertaking’s financial statements… A sustainability matter is
material from a financial perspective if it triggers or could reasonably be expected to
trigger material financial effects on the undertaking. This is the case when a sustain-
ability matter generates risks or opportunities that have a material influence, or could
reasonably be expected to have a material influence, on the undertaking’s develop-
ment, financial position, financial performance, cash flows, access to finance or cost
of capital over the short-, medium- or long-term [emphasis added].125
The ESRS 1 General Requirements elaborates:
Impact materiality and financial materiality assessments are inter-related and the
interdependencies between these two dimensions shall be considered. In general,
the starting point is the assessment of impacts, although there may also be mate-
rial risks and opportunities that are not related to the undertaking’s impacts. A
sustainability impact may be financially material from inception or become finan-
cially material, when it could reasonably be expected to affect the undertaking’s
financial position, financial performance, cash flows, its access to finance or cost of
capital over the short-, medium- or long-term. Impacts are captured by the impact
materiality perspective irrespective of whether or not they are financially material.126
By combining investor-focused materiality with impact materiality, the ESRS requires compa-
nies to prepare one set of disclosures to serve multiple purposes.

A closer look: double materiality

The ESRS refer to the combination of investor-focused or ‘financial’ materiality and impact
materiality as ‘double materiality.’

Early efforts to define double materiality described it as a company’s impacts on society

and the environment (i.e., impacts outside the organization) plus society and the environ-
ment’s impacts on a company’s financial performance (i.e., effects inside the organization).
Indeed, in its 2019 Guidelines on Reporting Climate-Related Information, the European
Commission defined double materiality as having two components: the traditional definition,
or ‘financial materiality’; and a company’s external impacts on the world, or ‘environmental
and social materiality.’127 This language suggests that all matters that are to be considered
material are those which are material from both the financial and impact perspective.

As the definition of double materiality in ESRS illustrates, the term has evolved to capture
and clarify the distinction between the financial and impact perspective. In other words, not
all information that is material from an impact perspective is necessarily material from a
financial perspective. However, the reality remains that the term ‘double materiality’, often
used often in public discourse and corporate and investor vernacular, can mean slightly
different things to different people.

125 EFRAG, ‘ESRS 1 General Requirements,’ Section 3.4. – 3.5., 31 July 2023.
126 EFRAG, ‘ESRS 1 General Requirements,’ Section 3.3., 31 July 2023.
127 European Commission, Guidelines on Reporting Climate-Related Information, Banking and Finance, 2019.

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7.4.1. STAKEHOLDER AND INVESTOR-FOCUSED

With respect to impact materiality, the ESRS identifies that ‘affected stakeholders’ should be
considered when materiality determinations are made. It does not delineate specific stakeholders
to which determinations based on impact materiality apply: however, it can be generally assumed
that these stakeholders include all those identified by GRI (such as government, customers, local
communities and others) as well as any other stakeholders identified by the company.
In line with financial materiality, the ESRS identifies that report users (users of sustainability
statements) must be considered when making materiality determinations. This means ‘primary
users of general purpose financial reporting’ as defined in the IFRS Sustainability Disclosure
Standards. In this way, reports prepared under the ESRS are designed to include decision-useful
information for investors as a subset of the total information provided.

7.5. PROCESS VS. OUTCOMES

Each approach to materiality requires preparers to conduct a materiality assessment as part of
the disclosure process. The ISSB, GRI and ESRS each outline steps and considerations for doing
so. Ultimately, these distinct approaches to materiality are designed to produce different outcomes.
With impact-focused standards such as the GRI Standards, preparers must identify and prior-
itize impacts for management and disclosure. For example, if a company determines that its GHG
emissions constitute a material impact, it would likely disclose information about its emissions, how
it plans to manage those emissions and, in particular, how its plans could contribute to sustainable
development.128
With investor-focused standards such as the IFRS Sustainability Disclosure Standards, prepar-
ers must determine if a sustainability-related risk or opportunity is reasonably likely to affect the
company’s prospects and, if so, disclose information that lends insight into how the company’s
management of that risk or opportunity could affect the financial position and performance of the
company in the short, medium and long term. For instance, if a company determines that manage-
ment of its GHG emissions could reasonably be expected to affect its prospects, it would likely
disclose information about its emissions, how it plans to manage those emissions, and, in particu-
lar, how its plans could impact its current and future financial position and operating performance.
With ESRS, preparers must determine if sustainability topics are material from an impact
perspective or an investor perspective, or both. They are not mutually exclusive. Impacts are often
material from an investor perspective if dependencies within the value chain create risks and
opportunities that influence the prospects of the company. For instance, many jurisdictions imple-
ment emissions-limiting regulation according to the planetary limits defined in the Paris Agreement.
A company’s failure to meet emissions reductions targets set in line with sustainable development
goals may also mean the company faces greater compliance risk. Here, the disclosure of GHG
emissions can satisfy both impact and investor-focused materiality. However, it will meet investor’s
information needs only if it also includes specific information that illuminates how the risk or oppor-
tunity is likely to affect the company’s financial position, performance and prospects.
This interplay between material topics and material information often comes up, albeit some-
times inaccurately, in present-day discourse around materiality and sustainability. Preparers,

128 GRI Standards, Consolidated Set of GRI Standards, p. 25.

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investors, consultants, the media and others often describe sustainability topics as being
‘material.’ In the context of impact materiality and the GRI Standards, this is an accurate way to
describe topics. However, in the context of investor-focused materiality and the IFRS Sustainability
Disclosure Standards, it is not the topics (meaning the risks or opportunities) themselves that are
material – it is the information related to those topics where true materiality judgments are applied.

A closer look: why sustainability-related risks and opportunities

are not technically material

While it may seem like splitting hairs, the following example helps to explain why it is import-
ant to clarify where standards produce material information as opposed to material topics.

Consider a company that faces an opportunity to improve cash flows by modifying its
product packaging. By switching its packaging to a lighter, 100% recyclable material, the
company will reduce the cost of material inputs and transportation in addition to reducing
the environmental impact associated with nonrecyclable packaging.
Investors will likely want to know that the company faces an opportunity related to pack-
aging lifecycle management. However, simple awareness of the opportunity is not likely to
influence their decisions. For sustainability information to be useful, they must also un-
derstand how it is linked to the company’s financial position, financial prospects and cash
flows. How can the company’s management of the topic affect revenue and market share?
What cost savings and operational efficiencies are achieved? How does it affect compli-
ance with extended consumer protection (EPR) regulation?
When preparing its disclosure, the company considers what particular information related
to packaging lifecycle management could reasonably be expected to influence investors’
decisions if it were omitted, misstated, or obscured. For instance, this information might
include the weight of packaging and how packaging weight connects to transportation
costs. It might include the percentage of material that can be recycled and how recyclability
connects to consumer purchase behavior. In this way, investor-focused materiality applied
to sustainability disclosure obligates preparers to achieve the same outcome as materiality
applied to financial disclosure, which is to provide decision-useful information to investors
that completely depicts the topic at hand.

The existence of these categorizations—investor-focused or ‘financial’ materiality and impact

materiality—reinforces the reality that not all sustainability information is equally relevant to all
users. In some cases, sustainability information provides insight into financial drivers such as cash
flows, market share, capital expenditures, intangible assets and risk premium. In other cases,
sustainability information provides insight into an organization’s impacts on the economy, environ-
ment or people. It is also possible to have cases where sustainability information provides insight
into both. Together with financial statements, these approaches can comprise a comprehensive
system of corporate disclosure where investors have the sustainability information they need to
make capital allocation decisions and civil society also has the information it needs related to
companies’ impacts. To solve the challenges involved in using sustainability information in capital
markets, it is imperative that investors can distinguish between information that is useful to their
decision-making processes and that which is not.

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7.5.1. THE DYNAMIC NATURE OF MATERIALITY

As discussed in Section 3.3., the materiality of information related to financial performance
can, and often does, change over time. The information that companies and investors consider
material today may not be material tomorrow, and vice versa. Though the materiality of information
has always been dynamic, the term ‘dynamic materiality’ is sometimes used in today’s corporate
and investor vernacular to describe this phenomenon applied to sustainability information.
In the context of sustainability disclosure, dynamic materiality can be used to describe the
interplay that can occur between impact materiality and investor-focused materiality. Take, for
example, the matter of plastic pollution in oceans. As plastic pollution accumulates and consum-
ers, lawmakers and other stakeholders grow their awareness of the matter, some companies, such
as those that produce or rely on plastic packaging, may find that their ability to reduce end-of-
use plastic waste begins to influence buyer decisions and thus may impact revenue and market
share. Consumers, civil society, NGOs and other stakeholders may look for information related to
a company’s end-of-use plastic waste to understand its impact on the environment and people,
while investors may seek information about how the company’s management of end-of-use plastic
waste affects its financial position, financial performance and prospects.
A Harvard Business School working paper describes several ‘pathways’ through which
‘sustainability issues could become financially material to corporations and their investors.’ For
instance, sustainability issues may become material as social interests and business interests align
as a result of stakeholder responses to harmful company actions, regulatory action that addresses
certain negative externalities, or other means. Emerging issues can be identified through ‘scenario
analysis, forward looking assessments, [and] alternative, industry specific data sets and new ways
of measuring impacts.’ Ultimately, ‘understanding which sustainability issues are material and how
they become so is increasingly important for corporate management, governance, investment
management and regulatory effectiveness.’ When it comes to sustainability disclosure, materiality
can change not just as a result of shifting company and investor priorities, but also as a result of
the nature of sustainability, where risks and opportunities associated with environmental, social,
and governance issues constantly evolve.

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CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
4 DISTINGUISH how ‘materiality’ is defined and used globally in the context of
reporting

? CHECK YOUR UNDERSTANDING

1. What is the ISSB’s approach to materiality?

2. What is the GRI’s approach to materiality?

3. What is the EFRAG’s approach to materiality?

JUMP TO ANSWERS

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SUSTAINABILITY
DISCLOSURE
ACROSS
JURISDICTIONS
8
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:
5 RECOGNIZE the roles of the organizations that make up the sustainability
information value chain.

6 RECOGNIZE the relationship between standard-setters and regulators, the

types of regulatory disclosure requirements and their implications for capital
markets.

8.1. T
 HE RELATIONSHIP BETWEEN STANDARD-SETTERS
AND REGULATORS
To interpret and understand the sustainability disclosure guidance issued by regulators in
specific jurisdictions, it is useful to first understand the relationship between regulators and the
organizations that set disclosure standards. The two play highly important roles that are both
complementary and distinct.
The foremost objective of national and international standard-setters is to independently
develop standards that are used by companies to prepare and disclose financial information and,
increasingly, climate and sustainability information. These standards constitute requirements on
how to account for various transactions and events so that, when applied by companies, they
produce consistent, relevant and reliable information for investors. It is not within the remit of stan-
dard-setting organizations to mandate disclosure, enforce the standards or monitor compliance.
Securities regulators—such as the Japan Financial Services Agency (FSA), UK FCA and US
SEC—typically have the authority to mandate, oversee and monitor reporting practices to ensure
companies provide accurate and timely information to investors. In other words, securities regu-
lators often determine who (i.e., companies listed on a stock exchange) must prepare and publish
disclosures, while standard-setters determine what information must be disclosed. Securities regu-
lators also have the authority to impose penalties on companies that do not comply with mandated
disclosure requirements or that engage in fraudulent reporting practices.
Disclosure standards become legally enforceable when domestic regulators require compa-
nies to use them. This dynamic exists at the national as well as international level. For example, the

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Accounting Standards Board of Japan (ASBJ) develops standards that are adopted by the Japan
FSA. The Financial Accounting Standards Board (FASB) develops standards that are adopted by
the US SEC. The global standards set by the International Accounting Standards Board (IASB),
and now the International Sustainability Standards Board (ISSB), are adopted by various regula-
tors throughout the globe. National standard-setters often look to the IASB and IFRS Sustainability
Disclosure Standards as a reference point, choosing to completely or partially adopt the interna-
tional standards to facilitate cross-border communication and investment while, at the same time,
considering local economic, legal and cultural factors that shape the information needs of its
jurisdiction. Indeed, of the more than 140 jurisdictions that mandate IFRS Accounting Standards,
the vast majority do so with little discrepancy.
Standard-setters and regulators may work together for several reasons:

• To shape new and updated standards: During standards development and maintenance,
regulators often participate in the standard-setting process by providing public comment
or serving on advisory committees to help ensure standards are enforceable and meet
investor needs.

• To promote adoption and proper implementation: Standard-setters and regulators often

cooperate to encourage the adoption and implementation of standards. For example, when
deciding whether to require new reporting standards, regulators will engage with standard-
setters to ensure they fully understand the scope and details of new reporting guidance.
In some instances, regulators may request additional guidance from the standard-setter to
determine if local requirements are equivalent (or partially equivalent) to the new reporting
standards, or if select deviations in the standards’ application are permissible or simply to
provide clarity on complex issues to ensure reporting is accurate and consistent.

• To interpret compliance: A standard-setter may sometimes support regulators by

interpreting a standard’s application to determine if compliance is met.
By working together, standard-setters and regulators jointly support stability and transparency
to global financial markets.
Figure 11—The relationship between standard-setters and financial regulators

Encourages standards adoption, provides guidance to support enforcement and monitoring

ENGAGEMENT

Standard Setters Regulators

• Develop disclosure • Permit the use of,
standards in the public recommend, or mandate
interest
Meet corporate disclosure using
investors’ specific standards
• Provide guidance to
reporting companies information • Enforce standards and
needs monitor compliance
• Maintain standards over
time • May impose legal
penalties

ENGAGEMENT
Encourages standards adoption, requests guidance, provides feedback during standard-setting process

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8.2. T
 HE GROWING PREVALENCE OF REGULATORY
DISCLOSURE GUIDANCE
As mentioned in Section 6.3.2., many regulators began issuing their own sustainability disclo-
sure guidance to listed companies in the years prior to the formation of the ISSB. In fact, as of
2016, most governments in the world’s largest economies and in many emerging markets have
imposed corporate disclosure requirements that cover ESG issues.130 Some local standard-setters
or securities regulators have taken a ‘from scratch’ approach and have developed their own local
sustainability reporting guidelines, while others reference voluntary disclosure guidance devel-
oped by independent organizations (such as the IIRC, SASB and TCFD). Indeed, companies with
operations in several countries increasingly must contend with different sustainability reporting
guidance from different jurisdictions.
The global growth in support for sustainability disclosure among financial regulators shows a
clear sign of progress toward more holistic corporate reporting. However, while the issuance of
sustainability reporting requirements by national regulators can improve the quantity and quality
of sustainability information available to investors, issuance on a national level does not address
the fragmentation that limits comparability and consistency demanded by global markets.

Intergovernmental regulatory representatives and individual regulators

that voiced support for the formation of the ISSB

• The G7 is an intergovernmental political, economic and financial forum representing

seven of the world’s largest industrialized democracies—Canada, France, Germany,
Italy, Japan, the UK and the US—which combined account for 40% of global GDP.
• The G20 is an intergovernmental forum for economic cooperation representing 19
countries and the EU: Argentina, Australia, Brazil, Canada, China, France, Germany,
India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea,
Turkey, the United Kingdom and the United States. Combined, these countries
represent 80% of global GDP.
• The International Organization of Securities Commissions (IOSCO) is the global
organization of securities regulators. IOSCO’s more than 120 members are responsible
for regulating more than 95% of the world’s securities markets.
• The Financial Stability Board (FSB) is an international organization established to
promote global financial stability by developing policies and recommendations, pro-
moting the implementation of international financial standards and best practices, and
coordinating the work of national financial authorities and international organizations.
The FSB created the TCFD Framework.
• The African Finance Ministers is a group of finance ministers representing the
54 countries that compose the African Union. They collaborate to promote economic
growth and sustainable investment, as well as to enhance financial inclusion and
foster foreign investment.
• Additional Finance Ministers and Central Bank Governors representing more than
40 jurisdictions.

130 PRI, ‘Corporate Disclosure Regulations,’ 1 September 2016, accessed October 2020; Carrots and Sticks, ‘Global Trends in
Sustainability Reporting Regulation and Policy,’ 2016.

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This is the regulatory landscape as it stood Securities regulators around

when the ISSB was founded. A landscape with the world
inconsistent disclosure standards and market
guidance makes it difficult to compare sustain- Securities commissions in a selection of
ability performance globally, creating barriers countries or regions with the largest stock
across markets and causing confusion among exchanges by market cap (in alphabetical
reporting companies and investors alike. In order):
fact, it was not only companies and investors Australia
voicing demand for consistent, comprehen- Australian Securities and Investments
sive sustainability disclosure. Regulators also Commission (ASIC)
expressed the need for a comprehensive
Brazil
global disclosure framework, evidenced by Comissão de Valores Mobiliários
support for the ISSB from leading global inter- (CVM; Securities and Exchange Commission
governmental organizations. of Brazil)

Canada
8.3. C
 OMMON TYPES OF Canadian Securities Administrators (CSA)

SUSTAINABILITY China (People’s Republic)

China Securities Regulatory Commission
REPORTING RULES (CSRC)
The existence of, and widespread support
European Union
for, a common set of sustainability disclosure European Securities and Markets
standards does not mean there is a one-size- Authority (ESMA)
fits-all approach to regulating disclosure around
France
the world. Jurisdictions consider the means
Autorité des Marchés Financiers (AMF)
and mechanisms best suited for implementing
quality disclosure in their home market. Local Germany
conditions for required disclosure vary based Federal Financial Supervisory Authority (BaFin)
on a variety of factors, such as: Hong Kong:
Hong Kong Securities and Futures
• the cur rent state of corporate Commission (SFC)
r e p o r t in g: W hat st andar ds ar e
currently being used? How widely India
Securities Exchange Board of India (SEBI)
are they adopted? How advanced is
sustainability reporting? Japan
Financial Services Agency (FSA)
• policy and economic environment:
Are sustainabilit y and climate South Africa
Financial Sector Conduct Authority (FSCA)
prioritized on policy agendas? How
investment-friendly are local policies? Korea (Republic of)
Financial Services Commission (FSC)
• industry composition: What sectors
are most important to the domestic Switzerland
economy and employment? How large Swiss Financial Market Supervisory
Authority (FINMA)
are companies? Are they public or
private? United Kingdom
Financial Services Authority (FSA)
• social context: Are local values
supportive of requiring companies to United States
US Securities and Exchange Commission
disclose information on environmental (US SEC)
and social matters?

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Some regulators introduce non-mandatory recommendations first, which can allow companies
to adopt new disclosure practices by helping them build capacity and ‘ease into’ new reporting
expectations. Indeed, even jurisdictions with the most rigorous financial reporting standards and
practices begin with voluntary or phased sustainability disclosure requirements. It is sometimes
the case that there is support for disclosure on a specific issue or issues before there is broad-
based support for reporting on all relevant sustainability issues. For example, though there has
not been a visible, globally coordinated effort among financial regulators to institute sustainability
reporting requirements and guidance, a look at global initiatives reveals a common practice of
prioritizing disclosure related to climate change.

8.3.1. C
 LIMATE FIRST: VOLUNTARY TO MANDATORY DISCLOSURE IN DIFFERENT
JURISDICTIONS
The following examples of climate disclosure regulation illustrate the different ways regulators
have addressed climate reporting. One will notice variation in who is issuing guidance, the means of
reporting (i.e., the information required and where it is disclosed) and which companies are targeted.
Canada
In Canada, securities regulation is determined by regional securities commissions in Canadian
provinces and territories. For example, the Ontario Securities Commission regulates the Toronto
Stock Exchange. The Canadian Securities Administration (CSA) coordinates efforts across provin-
cial securities regulators. The climate-related disclosure requirements set forth by the CSA have
become more specific and stringent over time.
For example, the CSA published the 2010 Staff Notice 51-333 Environmental Reporting
Guidance (‘CSA 2010 Notice’),131 which delineates disclosure requirements related to environmen-
tal matters. It clarified that disclosure of material environmental matters, including those related to
climate, is necessary to comply with the existing Continuous Disclosure Obligations established
earlier by National Instrument 51-102.132
The CSA later published Staff Notice 51-358: Reporting of Climate Change–related Risks (CSA
2019 Notice).133 The 2019 Staff Notice does not establish new or modify existing legal require-
ments. Rather, it expands on the 2010 Staff Notice to provide guidance to help report preparers
and their boards identify and disclose material climate change risks to investors.134 Notably, the
CSA 2019 Staff Notice acknowledges developments in voluntary disclosure frameworks and
explicitly references the TCFD Recommendations and the SASB Climate Risk Technical Bulletin
in its disclosure guidance.
More recently, in October 2021, the CSA proposed additional requirements for the disclosure
of climate information in regulatory filings by all reporting issuers (with some exceptions), citing
the need for improved completeness, comparability and specificity of information. These require-
ments include disclosure using the TCFD Recommendations, including scenario analysis, among
other things.135

131 CSA Staff Notice 51-333, Environmental Reporting Guidance, 27 October 2010.
132 National Instrument 51-102 Continuous Disclosure Obligations, 2011.
133 Ontario Securities Commission.
134 CSA Staff Notice 51-358, Reporting of Climate Change-Related Risks.
135 CSA Consultation, ‘Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-
107 Disclosure of Climate-related Matters,’ 18 October 2021.

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European Union
In 2014, the European Commission passed the groundbreaking Directive 2014/95/EU, more
commonly known as the Non-financial Reporting Directive (NFRD), which provided broad flexibility
to companies in determining the information to report.
In 2018, the European Commission unveiled the Sustainable Finance Action Plan, a compre-
hensive policy initiative aimed at mitigating climate change while promoting sustainable economic
growth by redirecting capital flows toward environmentally sustainable and socially responsi-
ble investments. The plan includes several regulatory measures, including the EU taxonomy,
which defines the criteria that economic activities (such as producing electricity, operating data
centers or insuring properties or business operations) need to satisfy to qualify as environmentally
sustainable.136 The EU taxonomy, with highly specific criteria for evaluating economic activities,
focuses solely on environmental performance. Notably, the first two components of the taxonomy
are climate change mitigation and adaptation. Although the taxonomy embraces a climate-first
approach, it leaves the door open to additional taxonomies in the future, including a potential focus
on information related to managing social issues.
In November 2022, the European Commission passed the Corporate Sustainability Reporting
Directive (CSRD), replacing the previously enacted NFRD. The NFRD originally compelled
public-interest companies (i.e., any private companies designated as public-interest entities by
national governments) with more than 500 employees to report information on a variety of sustain-
ability topics with its annual reports.137 The CSRD lays out more robust and specific requirements
to which a larger set of companies must comply, explicitly to promote the disclosure of ‘financial
risks and opportunities arising from climate change and other sustainability issues.’138
United States
In 2010 the US SEC released guidance (‘2010 Guidance’) explaining how companies should
apply existing disclosure requirements laid out in regulation to climate change information. It
explicitly acknowledges that certain requirements may create sustainability-related disclosure obli-
gations for companies, including the impact of legislation and regulation, impacts of international
agreements, indirect consequences of regulation or business trends and/or physical impacts of
climate change.139 The US SEC is, as of the time this chapter was written, considering whether to
finalize a mandatory climate reporting rule that was proposed in March 2022.
This ‘climate first’ approach can be attributed to a range of factors, many of which boil down
to the fact that companies, investors and governments recognize the economic and financial risk
associated with climate change. For capital markets, efforts to embrace climate reporting not only
represent a shift in what corporations must disclose—where an additional subset of non-financial
climate information enters the realm of financial performance evaluation—but also shape how
sustainability-related information is presented and communicated. The following section expands
on some key characteristics of disclosure guidance administered by regulators across the globe
and their implications for reporting companies.

136 EU Technical Expert Group on Sustainable Finance, Taxonomy Report: Technical Annex, March 2020.
137 Directive 2014/95/EU of the European Parliament and of the Council.
138 European Commission, Finance, ‘Corporate Sustainability Reporting,’ accessed August 2023.
139 SEC, ‘Commission Guidance Regarding Disclosure Related to Climate Change,’ Release Nos. 33-9106; 34-61469; FR-82, 2 February
2010 (hereafter cited as ‘2010 Release’).

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8.4. T
 YPES OF GUIDANCE SHAPING GLOBAL
DISCLOSURE RULES
The form sustainability disclosure requirements take (whether voluntary or mandatory) when
issued by regulators depends on a variety of factors, such as investor demand for sustainabil-
ity information, the history of sustainability reporting practices and enforcement, local company
capacity and policy support, among others.
When evaluating the type of guidance that exists across jurisdictions, one will notice that
sustainability disclosure guidance tends to reflect one or more common characteristics. Indeed,
as policy related to sustainability and financial regulation matures, governments tend to move
toward stronger requirements—‘from voluntary to mandatory, and from policy to implementation
and reporting.’140

8.4.1. INTERPRETIVE GUIDANCE

Some regulators have acknowledged that although ESG information may not be explicitly
identified in regulatory definitions of ‘materiality,’ sustainability information can be material in some
circumstances. To that end, they have published guidance explaining how to interpret existing
disclosure requirements in the context of sustainability information. Interpretive guidance clarifies
or elaborates on the application of existing guidance to sustainability information.

Example: Interpretive guidance

The US SEC 2010 Guidance referenced in Section 8.3.1. is ‘intended to assist companies
in satisfying their disclosure obligations under the federal securities laws and regulations.’
In other words, it explains to companies how certain sustainability information may be
reported under existing rules. Specifically, it elaborates on four climate change issues that
listed companies should consider for disclosure:
1.  egislative and regulatory impacts: Changes in federal and state legislation on cli-
L
mate change may trigger disclosure obligations. For example, pending legislation or reg-
ulation related to climate change might directly or indirectly lead to changes in profit or
loss arising from increased or decreased demand for a company’s goods and services.
2. I nternational accords: Issuers should disclosure material impacts of international
agreements and protocols regarding climate change mitigation.
3. Indirect consequences of regulation or business trends: Risks, as well as opportu-
nities, arising from developments in climate change law, politics or technology should be
considered for disclosure if they are determined to be material. Examples of such conse-
quences include increased or decreased demand for goods depending on the amount
of GHG emissions they produce; greater competition to develop innovative, sustainable
products; greater demand for energy from alternative and renewable sources; and
even the potential reputational impacts on business operations and financial condition if
companies experience reputational damage, or benefits, related to their climate change
response.
4.  hysical impacts of climate change: Severe weather events, changes in sea level,
P
decreases in arable farmland, changes in water quality and other physical changes that
may affect companies’ operations and financial performance should be disclosed.141

140 PRI, ‘Taking Stock: Sustainable Finance Policy Engagement and Policy Influence,’ 2020.
141 SEC, 2010 Release

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Rather than creating new disclosure requirements, interpretive guidance relies on existing
reporting rules and procedures. Such guidance helps companies understand their responsibility
to disclose sustainability information within the context of existing reporting practices.
By interpreting sustainability disclosure within existing legal frameworks, regulators, reporters
and investors alike can leverage existing processes and contextualize sustainability information
within established, widely understood objectives. Disclosure regulations exist to ensure the integ-
rity of reported information and support informed decision-making by capital markets’ participants.
Sustainability information can be a vital component of meeting existing requirements.

8.4.2. PRINCIPLES-BASED
Some regulators see benefits in allowing companies to choose what information would be
most relevant for users, and would likely opt for principles-based disclosure guidance as a result.
Such provisions aim to yield qualitative information and/or quantitative metrics while also allowing
companies to be flexible in their decisions to disclose specific metrics.

Example: Principles-based disclosure rules

Australian Securities and Investments Commission (ASIC) 2019 Regulatory Guide

(RG) 228 and 247: The ASIC issued two regulatory guides, a form of interpretive guidance,
that require climate change reporting in a company’s prospectus to retail clients or in its
annual operating and financial review. The guidance details disclosure requirements for
climate information in the context of the seminal Corporations Act of 2001, which dictates
disclosure requirements to maintain listed status. The guidance explicitly lists climate risks
as examples of common risks that may need to be disclosed in a prospectus and/or annual
report and highlights climate change as a potential risk that might impact impairment
calculations.142 The guides follow a principles-based approach. For example, RG 247
Effective Disclosure in an Operating and Financial Review states that companies should
‘concisely present key information about an entity’s operations and financial position for the
relevant reporting period.’ Rather than prescribing precisely what ought to be disclosed,
the guidance relies on the principle of conciseness to guide reporting companies.143

European Union Directive on Non-Financial Reporting (2014/95/EU): The EU NFRD

amended a previous accounting directive to require large companies to disclose non-fi-
nancial information regarding their management of social and environmental factors. The
directive affords a high degree of flexibility to reporting companies and requests information
ranging from corporate sustainability policies, narrative information and KPIs. The directive
is accompanied by non-binding guidance, which details six reporting principles. According
to this guidance, non-financial disclosure should be material; fair, balanced and under-
standable; comprehensive but concise; strategic and forward-looking; stakeholder-oriented;
and consistent and coherent.144

142 Australian Law Reform Commission, ‘Corporations Act 2001 (Cth)’; Baker McKenzie, ‘Australia: What ASIC’s Updated Regulatory
Guidelines on Climate Change Disclosures Mean in Practice,’ 26 August 2019.
143 ASIC, ‘Effective Disclosure in an Operating and Financial Review,’ August 2019.
144 European Commission, Directive 2014/95/EU of the European Parliament and of the Council, 22 October 2014; ‘Communication from
the Commission, Guidelines on Non-financial Reporting (Methodology for Reporting Non-financial Information),’ Official Journal of
the European Union, 2017.

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In contrast to a rules-based approach, which details specific reporting formats and stan-
dards with a relatively high degree of detail, principles-based guidance provides a list of tenets
that companies use to guide their reporting process. For example, MD&A offers principles-based
guidance that requires companies to report ‘known trends, events, and uncertainties.’ MD&A
disclosure guidance does not detail specific trends or events to report, but rather allows compa-
nies the flexibility to describe the financial matters that impact them. MD&A guidance also
encompasses quantitative information and states that companies should report key performance
indicators (KPIs). To avoid generic or boilerplate disclosures, principles-based disclosure guid-
ance sometimes references third-party resources to support implementation.
Principles-based reporting requirements can be applied to a company’s unique position,
rather than requiring a company to adjust its operations and processes to satisfy reporting require-
ments. The flexible application of principles-based guidance can hinder comparability but can still
increase the amount of information available to users.

8.4.3. COMPLY OR EXPLAIN

‘Comply or explain’ disclosure guidance requires reporting companies to either comply
with required rules or codes or explain why they have chosen not to. Such provisions can be a
starting point in promoting transparency from companies that are still relatively immature in devel-
oping processes to disclose reliable information and while the capital markets are still developing
systems to integrate the information into decision-making processes. In the relatively new field of
sustainability disclosure, comply-or-explain provisions offer companies a way to self-regulate145
and adhere to the requirements best suited to their specific business and operating environment
without risking legal penalization. These provisions also allow report users to assess for them-
selves whether non-compliance is justified, effectively ‘letting the market decide’ what information
is adequate and useful to investment decisions. The use of comply-or-explain provisions within
sustainability disclosure policy and accompanying guidance has grown significantly. One global
analysis found 17 comply-or-explain provisions issued by government agencies in 2016. Just four
years later, the same analysis found 62 issued by government agencies.146

Example: ‘Comply or explain’ disclosure rules

2019 Philippines SEC Memorandum Circular No. 4: The Securities and Exchange Com-
mission in the Philippines released SEC Memorandum Circular No. 4, Series of 2019 for
‘Sustainability Reporting Guidelines for Publicly-listed Companies’ to promote sustainability
reporting. The guidelines help publicly listed companies assess and manage non-finan-
cial performance across ESG topics relevant to each company, as well as ‘measure and
monitor their contributions towards achieving universal targets of sustainability,’ such as the
UN Sustainable Development Goals and other national programs. The SEC Memorandum
Circular No. 4 specifies that the guidelines must be adopted using a comply-or-explain
approach for the first three years. Companies may choose to omit disclosure of particular
ESG information if they provide an explanation for instances where the company does not
yet have data to disclose.147

145 Virginia Harper Ho, ‘How a ‘Comply-or-Explain’ Rule Would Improve Non-financial Disclosure,’ The CLS Blue Sky Blog on
Corporations and the Capital Markets, Columbia Law School, 14 March 2017.
146 Carrots and Sticks, ‘Sustainability Reporting Policy,’ 2020.
147 Securities and Exchange Commission Philippines, ‘SEC Memorandum Circular No. 4: Subject: Sustainability Reporting Guidelines for
Publicly Listed Companies,’ 2019.

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For regulators, a comply- or- explain

approach offers a path to improved sustain- THE MEANING OF MANDATES
ability disclosure where there is currently
no one-size-fits-all solution. The flexibility of Regulatory mandates apply to different
comply or explain helps increase disclosure types of sustainability disclosures.
(and ESG data availability) without placing
premature disclosure burdens on companies. Flexible: Mandated principles-based
However, the flexibility of comply or explain reporting produces a different outcome
also limits the comparability of disclosures and than mandated line-item reporting. In the
can lead to a wide range of disclosure quality. former, mandates support an increased
In addition to regulators, other organizations breadth of information provided by
such as stock exchanges also use comply-or- companies, as flexible application allows
companies to choose the reporting topics
explain rules in disclosure guidance.
material to their audiences.

8.4.4. MANDATORY LINE ITEMS Prescriptive: However, flexible reporting

does not address the issue of compa-
As with financial statements, some
rability. Mandated line-item disclosure
sustainability disclosure guidance requires
standardizes specific reporting metrics
information to be disclosed using a specified
and strengthens the comparability of
methodology to produce specific line items.
reported information. However, over-
Traditional financial disclosure line items
ly prescriptive reporting can result in
include information such as operating reve-
non-decision-useful information because
nues, net income and total assets. However,
not all requirements are equally relevant
line items for sustainability disclosure may
to each company’s circumstances.
extend to a number of environmental, social or
governance data.

• EU Taxonomy for Sustainable Economic Activities: The EU Taxonomy, one of four

pieces of legislation included in the European Commission’s action plan for financing
sustainable growth, requires companies to disclose sustainability information in
non-financial statements. By defining the economic activities that can be classified as
environmentally sustainable, the taxonomy enables the measurement of sustainable flows
of capital.148 As of January 2022, companies are expected to disclose turnover derived
from activities that qualify as environmentally sustainable and, when applicable, capital
expenditures and operating expenditures associated with qualifying activities.149

• Japan’s Mandatory Greenhouse Gas Accounting and Reporting System: Passed in

2006, Japan’s GHG emissions legislation requires emissions disclosure from companies
emitting certain greenhouse gases and/or companies that consume a certain amount of
energy derived from carbon dioxide. The legislation is jointly overseen by the Ministry of
the Environment and the Ministry of Economy, Trade and Industry. In mandating GHG
emissions disclosures, the government expects the requirement will provide shareholders
and investors with comparable information when assessing the efficacy of corporate
strategy in the face of climate change.150

148 PRI, ‘Action 1: Sustainability Taxonomy,’ 1 August 2018.

149 EU Technical Expert Group on Sustainable Finance, Taxonomy: Final Report of the Technical Expert Group on Sustainable Finance,
March 2020.
150 OECD, Corporate Greenhouse Gas Emission Reporting: A Stocktaking of Government Schemes (OECD Publishing, 2012).

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

Mandated line-item disclosure generally makes it easier to compare information. Where

companies report the same metrics, investors can better evaluate performance on each metric
over time, relative to industry peers, and even against national or global sustainability goals.
However, there are trade-offs between comparability and flexibility. Where companies are required
to report specific metrics, they may forego the option to disclose data that more accurately reflects
their unique business and circumstances.
In this rapidly evolving landscape, new regulatory disclosure guidance will continue to be
introduced and will change over time. The above four characteristics—interpretation of existing
guidance, principles-based requirements, comply or explain, and line-item disclosure—offer a
framework for interpreting new regulatory efforts as they are enacted. For example, in 2020, New
Zealand proposed mandatory climate-related financial disclosure, a regulation that would require
companies to disclose according to the TCFD Recommendations, if implemented as proposed.
The regulation, by means of the TCFD Recommendations, would yield qualitative information
about governance, strategy and risk management, and would allow for flexible implementation of
quantitative information, since the TCFD does not provide specific metrics for companies to use.

8.5. THE INFLUENCE OF CORPORATE GOVERNANCE

CODES
Though not a form of disclosure guidance per se, sustainability disclosure has also entered
the lexicon of corporate governance codes around the world. Such codes establish rules of
conduct for board members within the context of primary duties of oversight to promote long-
term value creation. As with disclosure guidance, some corporate governance codes are issued
by regulatory bodies while others are published by non-government groups. Many corporate
governance codes explicitly describe the board’s role in overseeing the company’s disclosures
to shareholders primarily, and in some cases to other stakeholders as well. Increasingly, corporate
governance codes identify sustainability considerations as being among the board’s responsibil-
ities. For example:

• Japan’s Ministry of Economy, Trade and Industry (METI) Practical Guidelines for
Corporate Governance Systems (CGS): METI’s CGS guidelines explicitly call out the
responsibilities of corporate management to comprehensively consider the impacts of
ESG on ‘value, business model, risks, strategy, and other relevant matters.’ The guidance
also recognizes ESG information as a core component of integrated disclosure, where
companies have an obligation to report ESG-related governance information in investor-
facing communications on ‘collaborative value creation.’151

• King IV Report on Corporate Governance for South Africa, 2016: The King IV Codes,
issued by the King Committee on Corporate Governance, elaborate on the critical role of
governance in providing ‘transparent and meaningful reporting to stakeholders,’ among
other guidance items. The King IV Codes outline a list of fundamental concepts applied
to governance and reporting (a principles-based approach) and detail the scope of the
comply-or-explain model in assessing whether these principles have been met. Specifically,

151 Ministry of Economy, Trade and Industry, ‘Practical Guidelines for Corporate Governance Systems (CGS Guidelines),’ Provisional
Translation, 28 September 2018.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

the King IV Codes detail the role of the governing body in disclosing company strategy and
performance where they have a responsibility to oversee reports, including sustainability
reports, with the ultimate goal of enabling ‘stakeholders to make informed assessments of
the organization’s performance, and its short-, medium-, and long-term prospects.’ The
King IV Codes also promote the use of integrated reporting, publicly endorsing use of the
IIRC’s Integrated Reporting Framework as a best practice for reporting companies.152
As boards recognize the materiality of sustainability information to companies and its utility in
communicating performance to investors, ESG-related corporate governance codes can provide
guidance—either mandatory or voluntary—on the content and format of sustainability disclosures.

8.6. B
 ALANCING FLEXIBLE IMPLEMENTATION
WITH USABLE INFORMATION
Ideally, sustainability disclosure requirements establish the right balance between flexible
implementation among preparers and the usability of information in the broader market. Flexible
implementation makes it easier for companies to report information, thus increasing the level of
disclosure, but risks proliferating information that is not comparable or decision-useful. On the
other hand, specific and more stringent requirements support comparability and decision-use-
fulness but risk creating pushback or frustration from the corporate community, especially if the
requirements are overburdensome and not well crafted.
Figure 12—The evolving spectrum of sustainability reporting rules

Well-crafted standards potentially offer the most viable long-term solution. Standards can
enable comparability without prohibiting companies from making appropriate and useful adjust-
ments or additions. For example, the widely adopted IFRS Accounting Standards allow different
levels of application and modification. Companies may apply them differently depending on
enterprise type (domestic public companies, foreign-listed companies or small and medium enter-
prises).153 Even within the same jurisdiction, companies may have the discretion to customize their
disclosure. A report prepared using IFRS Accounting Standards by a German company may look
slightly different from a report provided by a French company, though the information provided
would be comparable for most topics. Materiality plays an important role in striking the balance
between flexibility and usability. Even where standards contain specific line items, the decisions
to disclose those line items rests on their materiality.
In the realm of voluntary standards and frameworks, the same considerations apply. For exam-
ple, when applying SASB Standards to meet reporting requirements (regulatory or voluntary),

152 Institute of Directors Southern Africa, King IV Report on Corporate Governance for Southern Africa 2016, 2016.
153 IFRS, ‘Who Uses IFRS Standards,’ accessed October 2023.

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companies are provided with a set of sustainability-related risks and opportunities most likely to
be material to companies in a given industry. However, companies with unique operating circum-
stances or audiences may select the disclosure topics best suited for the company. Standards
allow comparability where metrics are reported in the same way by different companies, but they
can also enable disclosures tailored to specific corporate and jurisdictional contexts.
The various characteristics of sustainability disclosure do not constitute an either-or choice.
Principles-based disclosure can also contain specific line items where a company chooses to
report using certain metrics; line-item disclosure can follow comply-or-explain rules; and so on.
Over time, regulatory efforts may embrace more comparability-focused disclosures (as they have
with financial reporting) without completely compromising flexible implementation.
What two goals must sustainability disclosure rules balance, and how do disclosure standards
help achieve that balance?

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
5 RECOGNIZE the relationship between standard setters and regulators, the
types of regulatory disclosure requirements and their implications for capital
markets.

6 RECOGNIZE the roles of the organizations that make up the sustainability

information value chain.

? CHECK YOUR UNDERSTANDING

1.  hat does ‘climate first’ disclosure guidance tell us about regulators’ approach to
W
sustainability disclosure globally?

2. What are four common types of sustainability disclosure rules?

3. W
 hat two goals must sustainability disclosure rules balance, and how do disclosure
standards help achieve that balance?

JUMP TO ANSWERS

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PART III
UNDERSTANDING
IFRS SUSTAINABILITY
DISCLOSURE STANDARDS

Part III provides an overview of the IFRS Sustainability Disclosure

Standards. The following chapters cover:

• what the Standards are designed to achieve, including the qualitative

characteristics of useful sustainability-related financial information;

• how the IFRS Sustainability Disclosure Standards are designed,

including core content and general requirements for disclosure; and

• the standard-setting process, including the ISSB’s governance

model and due process.
Part III also explores a sample of pre-ISSB sustainability disclosures,
which together provide an understanding of the various ways companies
choose to report sustainability-related financial information using the stan-
dards and frameworks that the ISSB used to create the IFRS Sustainability
Disclosure Standards. This includes:

• why companies report using sustainability disclosure standards;

• where companies disclose;

• what information companies disclose; and

• how the information is presented and communicated.

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHAT IS USEFUL
SUSTAINABILITY-
RELATED FINANCIAL
INFORMATION?
9
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:

7 RECALL the inaugural goals of the ISSB and the characteristics of useful
sustainability-related financial information.

9.1. THE IMPORTANCE OF STANDARDS

Globally and throughout history, standards
have contributed to improved economic func- [Without standards] there would be
tion. Consider some of the first standards to no consistency, no comparability, little
ever exist. During ancient Egypt’s early dynas- transparency and a lack of trust in the
tic period, standard measurements for weight information, which would lead to higher
and quantity were developed to determine the costs of capital and increased risks for
value of commodities, thus facilitating a robust investors .’
barter economy. Since the advent of trade, — Edmund L. Jenkins, former FASB Chairman
commerce and capital markets, standards
have improved market efficiency and price
discovery and have enabled access to resources. For instance, in Real Estate, standardized
property condition assessments, appraisal methods and reporting practices allows buyers and
sellers to determine the price of a home.
But standards cannot produce these benefits if the information they provide is not relevant and
complete enough to be useful assessing value and deciding whether to buy or sell. For example,
a developer purchasing timber for a building project will need to know more than just the wood’s
dimension and product quantity to make a purchase decision. They will also need to know the
wood’s strength, moisture content (which effects its stability and durability) and grade (a rating that
reflects its appearance and structural characteristics)—a more comprehensive set of information
that can be used to compare products to decide if the product at hand is suitable and how much
they are willing to pay.
Today, standards for corporate disclosure (both monetary and non-monetary) exist to achieve
this same objective; to provide users with a complete set of useful information to make decisions.
Although the FASB and IASB have been working to maintain and enhance US GAAP and interna-
tional GAAP for decades, no such standards had been developed for sustainability information
until recently (as discussed in Chapter 6). Markets still have room to grow in terms of the usefulness
of standardized sustainability information.

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9.2. SUSTAINABILITY: A UNIQUE CONTEXT

Companies and investors have struggled with sustainability disclosures in part because
of the perceived notion that sustainability is inherently more complex as a concept than finan-
cial accounting. The reality is that there is some simplicity and complexity in both. For financial
accounting, which must account for events and transactions that occur during a reporting period,
recording the effects of transactions can be relatively straightforward, especially when cash is
part of the exchange. However, things become considerably more challenging when an event
or transaction does not involve a straightforward exchange for cash. It is in these situations that
high-quality standards can be particularly useful. The same thing is true for sustainability informa-
tion. Some activities are relatively straightforward to account for, such as energy or water usage,
or incident rates related to employee health and safety. At the same time other matters, such as
employee engagement or climate resilience, can be more complicated. Note also that sustainabil-
ity information covers not only activities that an entity is directly involved in, but also the impacts
and dependencies that an entity is indirectly exposed to as a result of its activities.
Sustainability-related financial disclosure is therefore designed to help investors gain a
broader understanding of how a company operates within a connected, interdependent system,
because a company’s ability to generate cash flows is ‘inextricably linked’ to its interactions with
stakeholders, society, the economy and the natural environment. To create products and services,
a company relies on various resources and relationships throughout the entire value chain. This
includes those that are natural, manufactured, intellectual, human and social as well as financial.
They can be internal (such as a company’s workforce or organizational processes), external (such
as physical materials procurement or supplier relationships), direct (such as distributor relation-
ships or Scope 1 GHG emissions) or indirect (such as the effects of the consumption or disposal
of products). The effects companies have on their resources and relationships at each stage in
the value chain can lead to sustainability-related risks and opportunities that are critical to under-
standing financial performance, financial position and prospects.
Sustainability-related financial disclosure goes beyond what is captured in a company’s
current financial statements. It aims to communicate how companies’ activities and outputs affect
the development, preservation, regeneration, degradation, or depletion of the resources and
relationships that matter to financial performance. To make informed decisions, investors must be
able to assess how well companies manage their resources and relationships. While the outcome
of applying the IFRS Sustainability Disclosure Standards is the same as with all disclosure stan-
dards (to provide consistent, comparable, useful information), the path to achieving this outcome,
defined by the Standards themselves and the work of the ISSB, is uniquely designed to account
for the interdependent nature of sustainability.

9.3. THE GOALS OF THE INTERNATIONAL

SUSTAINABILITY STANDARDS BOARD
When founded, the ISSB set several goals that provide useful context for understanding how
the Standards are designed. As will be discussed in more detail in Section 9.5., the paramount
objective of the Standards is to provide decision-useful information to investors. In support of this
objective, the founding goals of the ISSB are to develop sustainability disclosure standards that:
1. Enable companies to provide comprehensive information;

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2. Are internationally applicable; and

3. Serve as a baseline of disclosure from which jurisdictions can build.
Though the goals of the ISSB may evolve over time as disclosure practices and markets
continue to mature, these three inaugural goals help articulate what the Standards are fundamen-
tally designed to achieve.

9.3.1. COMPREHENSIVE INFORMATION

As discussed in Chapters 6 and 7, the dynamic nature of sustainability and the historical frag-
mentation of sustainability disclosure have contributed to sustainability reporting practices that
often focus on specific issues such as climate change, pollution and social equity among others.
Financial statements are primarily designed to communicate information related to the current
financial performance and position of a company. Due to the combination of these factors, compa-
nies have rarely been prompted to consider and report on all the sustainability-related risks and
opportunities that affect cash flows and access to/cost of capital, meaning investors have rarely
had access to all the information that could reasonably influence investment decisions.
Companies and investors benefit from understanding all the risks and opportunities relevant
to financial performance and prospects—spanning natural, manufactured, intellectual, human,
social as well as financial resources and relationships. Indeed, having comprehensive informa-
tion is essential to investors’ ability to make informed decisions and to foster transparency and
trust throughout global markets. For this reason, the IFRS Sustainability Disclosure Standards are
designed to support companies in disclosing material information on all the sustainability-related
risks and opportunities that could reasonably be expected to affect the entity’s cash flows and its
access to finance or cost of capital over the short, medium or long term.

9.3.2. INTERNATIONAL APPLICABILITY

Companies and investors operate globally and therefore benefit from an internationally appli-
cable set of standards. IFRS Sustainability Disclosure Standards are designed to be effective and
useful for companies and investors regardless of country of domicile, location of operations, or
economic setting. Several features of the IFRS Sustainability Disclosure Standards help ensure
the Standards are internationally applicable.

9.3.2.1. GAAP agnostic:

The IFRS Sustainability Disclosure Standards are designed to work with generally accepted
accounting principles used in any jurisdiction to prepare financial statements, including the IFRS
Accounting Standards.
Compatibility between the IFRS Sustainability Disclosure Standards and financial accounting
standards is achieved by aligning core concepts that dictate when, where, and how companies
disclose information. For example, the IFRS Sustainability Disclosure Standards use the same
definition of investor-focused materiality that is applied, in full or in part, in most jurisdictions. The
Standards require companies to report sustainability-related financial disclosures at the same time
and using the same periods as the financial statements. They also require companies to use the
same reporting entity that is used for financial statements. Such provisions help ensure that the
sustainability data used by investors is delivered in a manner and timing that is consistent with the
financial data provided by the company, thus enabling effective analysis.

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9.3.2.2. Globally relevant metrics

As mentioned in Section 6.4., the SASB Standards are an integral component of the IFRS
Sustainability Disclosure Standards. The metrics provided by the SASB Standards have been
developed to apply internationally, meaning they avoid relying on jurisdiction-specific laws, regu-
lations or definitions in a way that would introduce regional bias or application challenges.
This is achieved in part because the Standards focus on business issues, not geographies.
Sustainability-related risks and opportunities faced by an industry are generally consistent across
the globe. For example, real estate assets consume significant amounts of energy for space heat-
ing, ventilating, air conditioning, water heating, lighting and using equipment and appliances.
Overall, companies that effectively manage asset energy performance may realize reduced oper-
ating costs and regulatory risks, as well as increased tenant demand, rental rates and occupancy
rates—all of which drive revenue and asset value appreciation. This is true whether the company
operates in Brazil, Canada, England or Singapore. The risks and opportunities associated with
energy management in the Real Estate industry are generally consistent across the globe (though
specific company circumstances are unique), and the information needed to assess financial
implications of energy management tends to be highly similar across regions.

9.3.3. INTEROPERABLE WITH JURISDICTIONAL REQUIREMENTS AND MULTI-

STAKEHOLDER REPORTING
As mentioned in Section 8.3., the international standardization of disclosure does not mean
there is complete uniformity in reporting practices across the globe. There is a general baseline of
consistent information; regardless of the type of GAAP a company applies, all companies disclose
their revenues, expenses, assets, liabilities and cash flows when they prepare financial statements.
However, different jurisdictions often have slightly different or additional disclosure rules suited
to their unique market. For example, in Saudi Arabia the Saudi Organization for Chartered and
Professional Accountants requires the application of IFRS Accounting Standards for all publicly
listed companies but has added disclosure requirements to several IFRS Accounting Standards,
primarily to reflect Sharia or local law.154 The need for customization in some jurisdictions exists for
sustainability disclosure as well. Furthermore, companies often have additional goals for sustain-
ability reporting beyond investor-focused communication.
The IFRS Sustainability Disclosure Standards are thus designed to be compatible with local
disclosure rules of major jurisdictions (such as ESRS) and complementary to multi-stakeholder
reporting standards (such as the GRI Standards). The ISSB engages with global, regional and
jurisdictional policymakers and regulators to ensure their perspectives are discussed and consid-
ered as part of the ISSB’s standard-setting. Where necessary, these organizations work together
to reduce duplication between requirements and identify where the IFRS Sustainability Disclosure
Standards satisfy exsiting and future reporting requirements. Sometimes referred to as ‘the
building blocks’ approach, this strategy provides a comprehensive foundation of sustainability
information that meets investor needs across markets while also supporting companies’ disclosure
to non-investor stakeholders.

154 IFRS Foundation, ‘IFRS Standards—Application around the World; Jurisdictional Profile: Saudi Arabia,’ 28 July 2022.

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Figure 13—The IFRS Sustainability Disclosure Standards provide a global baseline

additional • jurisdiction-specific requirements

building blocks • broader multi-stakeholder needs

ISSB Standards
• provide a comprehensive foundation of disclosures for global jurisdictional adoption
• are a common language for comparable, decision-useful disclosures
• are designed to meet investor needs across global capital markets

9.4. A
 DDITIONAL CHARACTERISTICS OF THE IFRS
SUSTAINABILITY DISCLOSURE STANDARDS
In addition to the inaugural goals of the ISSB described above, the IFRS Sustainability
Disclosure Standards are characterized by two additional goals that the market has proved
necessary for useful investor-focused sustainability disclosure. The IFRS Sustainability Disclosure
Standards are industry-based and cost-effective.

9.4.1. INDUSTRY-SPECIFIC
By building the SASB Standards into the IFRS Sustainability Disclosure Standards, the ISSB
follows an industry-based approach to standard-setting to capture the sustainability information
that matters most to companies’ performance across industries. The IFRS Sustainability Disclosure
Standards prompt the disclose of cross-industry information where necessary and, at the same
time, enable companies and investors to focus on the sustainability-related risks and opportuni-
ties (and the information related to those risks and opportunities) most closely associated with
particular business models, activities, and other common features that characterize participation
in an industry. A more industry-agnostic approach to disclosure might produce information that
is broadly applicable but not entirely pertinent to a given company or overlook information that is
important to a significant subset of companies. However, an industry-specific approach produces
more tailored, useful disclosures while achieving the market benefits provided by standardization.
For example, iron and steel producers must contend with risks related to managing hazardous
waste—a biproduct of operations that can adversely impact human health and the environment,
present regulatory risk and affect operating costs. Investment banking companies, on the other
hand, do not face risk related to hazardous waste management. Rather, they tend to face high
competition for skilled employees and are therefore likely to encounter risks and opportunities
related to employee engagement, diversity and inclusion. In many cases, a sustainability matter
relevant to one industry will not be relevant to another.
In other cases, the same sustainability matter can affect multiple industries, albeit with unique
manifestations. Consider climate change, which affects companies across various industries. In
the Automobiles industry, for example, use-phase emissions have become an increasing focus of
regulator and consumer attention. Given the generation of local air pollutants and rising fuel costs,
demand has significantly increased for fuel-efficient, hybrid and electric vehicles. Companies in
this industry may face opportunities to capture this demand to improve revenue and market share.

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They may also face significant transition risk associated with regulatory requirements and chang-
ing buyer preferences. Meanwhile, in the Telecommunication Services industry, extreme weather
associated with climate change can pose physical risk to network infrastructure, resulting in
technology disruptions that can lead to reputation and brand damage with long-term effects on
market share and revenue. In this way, matters such as climate change are ubiquitous but differ-
entiated. They affect the financial performance of companies across a variety of industries, but
those affects are unique to each industry.
Table 3—Industry-specific disclosure topics and metrics for climate-related disclosure

INDUSTRY DISCLOSURE TOPIC METRIC

(1) Total energy consumed by portfolio area with data

coverage, (2) percentage grid electricity and (3) percent-
Real Estate Energy Management
age renewable, by property sector (Gigajoules (GJ),
Percentage (%))

(1) Total water withdrawn, (2) total water

Meat, Poultry & consumed; percentage of each in regions with High or
Water Management
Dairy Extremely High Baseline Water Stress (Thousand cubic
metres (m³), Percentage (%))

Gross global Scope 1 emissions, percentage methane,

Oil & Gas Reserves Valuation &
percentage covered under emissions-limiting regulations
- Midstream Capital Expenditures
(Metric tons (t) CO2-e, Percentage (%))

Electric Utilities GHG Emissions &

Greenhouse gas (GHG) emissions associated with
& Power Energy Resource
power deliveries (Metric tons (t) CO2-e)
Generators Planning

Fuel Economy & Sales-weighted average passenger fleet fuel economy,

Automobiles
Use-phase Emissions by region (Mpg, L/km, gCO2/km, km/L)

Incorporation of Amount of assets under management, by asset class,

Asset Management ESG Factors in that employ (1) integration of environmental, social, and
& Custody Activities Management and governance (ESG) issues, (2) sustainability themed
Advisory investing and (3) screening (presentation currency)

9.4.2. COST-EFFECTIVE
Data collection and reporting require resources—both monetary and human. Regulatory
requirements have long taken into consideration the potential burden that mandatory disclosure
can place on reporting companies, recognizing that disclosure will be most effective when compa-
nies have the resources to meet reporting demands. Sustainability disclosure is no different.
The ISSB explicitly takes cost-effectiveness into account throughout the standard-setting
processes—applied to the IFRS Sustainability Disclosure Standards and SASB Standards—so that
the benefits of using of the Standards exceeds, or at least justifies, the costs of implementation.
When determining which disclosures to include in the Standards, the ISSB considers whether
data is already being collected by most companies or could be collected in a timely manner and
at a reasonable cost. For example, IFRS S1 points to the SASB Standards and IFRS S2 uses the
GHG Protocol for calculating cross-industry GHG emissions. While cost-effectiveness must be
balanced with the need for international applicability and decision-usefulness for investors, the

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Standards do not simply impose a litany of new metrics that companies are obligated to report.

9.5. T
 HE PRIMARY OBJECTIVE OF THE IFRS
SUSTAINABILITY DISCLOSURE STANDARDS
The goals of the ISSB discussed above are crucial to understanding the role of the ISSB in
capital markets and the considerations unique to sustainability disclosure that shape the ISSB’s stan-
dard-setting process and the IFRS Sustainability Disclosure Standards. It is important to recognize,
however, that the foremost purpose of the IFRS Sustainability Disclosure Standards is to provide
useful information to investors. As articulated in IFRS S1: General Requirements for Disclosure of
Sustainability-related Financial Information,
The objective of IFRS S1 General Requirements for Disclosure of Sustainability-related
Financial Information is to require an entity to disclose information about its sustainabil-
ity-related risks and opportunities that is useful to primary users of general purpose
financial reports in making decisions relating to providing resources to the entity.155
For companies to produce information that is useful and for investors to recognize if information
can indeed be used in decision-making processes, it is important to have a strong understanding
of what ‘usefulness’ truly means.

9.5.1. Q
 UALITATIVE CHARACTERISTICS OF USEFUL SUSTAINABILITY-RELATED
FINANCIAL INFORMATION
Drawing from the Conceptual Framework for Financial Reporting first developed to support the
International Accounting Standards Board’s development of the IFRS Accounting Standards, the
ISSB has defined the characteristics of useful sustainability-related financial information. Though
defined to support the standard-setting process, these characteristics can also serve as a useful
framework for professionals seeking to determine what sustainability information to report and if it
can be reliably used to inform investment decisions.
Two fundamental characteristics and four secondary characteristics define useful sustain-
ability-related financial information. Sustainability-related financial information is useful if it is (1)
relevant and (2) represented faithfully. The usefulness of sustainability-related financial information
is enhanced if it is (3) comparable, (4) verifiable, (5) timely and (6) understandable. The following
two sections explore these characteristics in more detail.

9.5.1.1. Defining ‘relevance’ and ‘faithful representation’

1. Relevance: Sustainability-related financial information is relevant if it can make a difference
in the decisions of primary users. Relevant information can be identified by whether or not
it has predictive value or confirmatory value.

Information has predictive value if it can be used by investors to predict future outcomes.
Investors use various processes to predict future outcomes, such as fundamental analysis,
quantitative analysis and scenario analysis. Information’s predictive value is therefore a
matter of whether it can be used as an input to these processes. For example, consider
a company in the Processed Foods industry that sources a very small percentage of its

155 IFRS Foundation, ‘IFRS S1,’ paragraph 1.

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ingredients from facilities with a recognized food-safety certification, a metric tied to risk
related to costly recalls, write-downs, and ultimately affect profitability. This may influence a
user’s understanding of the company’s risk exposure related to food safety. When factored
into the user’s overall risk analysis, this may result in an adjustment to risk variables in a
valuation model, lowering the estimated value of the company.

Information has confirmatory value if it confirms or changes a user’s previous

evaluations. For example, if that same company begins reporting product recalls due to
food contamination, this could confirm a user’s belief or expectation that the company is
exposed to risk related to food safety.
2. Faithful representation: To faithfully represent a sustainability-related risk or opportunity,
a disclosure must describe that risk or opportunity (using qualitative and/or quantitative
information) in a way that is complete, neutral and accurate.

Information is complete if it includes all the information necessary for users to understand
the risk or opportunity faced by a company.

For example, say a company in the Toys & Sporting Goods industry faces risk related to
product quality and safety, where hazards associated with chemicals in products can
cause recalls and costly litigation. If the company provides its policy for assessing and
managing hazards associated with chemicals in its products (its plans and approach to
managing the issue), but no information about product safety performance (such as the
results of supplier audits, the number of recalls, total units recalled or total monetary losses
as a result of legal proceedings associated with product safety), primary users may not
have enough information to assess the level of risk associated with this matter.

Users should also be able to consider the risk associated with the matter of product safety
in the context of all other information provided in a company’s sustainability-related financial
disclosures to gain a full picture of all risks and opportunities it faces.

If a company fails to disclose a risk or an opportunity that is reasonably likely to affect its cash
flows, access to financial and cost of capital, it likely is not providing complete information.

Neutral information is information that is not biased. In other words, when information is
prepared for disclosure, it is not selected or manipulated (emphasized, deemphasized, omitted,
etc.) in a way that makes it more or less likely that a user will interpret it favorably or unfavorably.
For example, say a company discloses a net-zero emissions target to be achieved by a certain
date. When discussing this target, the company describes the factors that will contribute to its
ability to successfully meet the target—such as energy-efficiency improvements, increases
in renewable energy sourcing and employee training—but does not describe the factors
that could reasonably hinder its ability to meet it—such as known operational constraints or
potentially disruptive shifts in external economic conditions. The omission of known factors
that could prevent the company from achieving its target could reasonably make a difference
in users’ decisions. In this case, the company is not representing the risks and opportunities
associated with the net-zero emissions target in a neutral manner.

Sustainability information is accurate when it is free from material error; descriptions are
precise; and estimates, approximations and forecasts are identified as such. Here, it is
important to distinguish between precise descriptions and precise information.

Descriptions (qualitative information) are precise when they are clearly written and do not
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contain superfluous information. Sustainability-related financial information (quantitative)

often involves estimates and approximations—measurements that, by definition, involve
some degree of uncertainty and are not perfectly precise. Where uncertainty is involved,
preparers can still achieve accuracy by disclosing estimation uncertainty—a measure
used to indicate how uncertain the preparer is in the precision of the estimate—as well as
the sources of that uncertainty. Indeed, uncertainty almost always exists where information
is future-oriented and complex systems (such as social or climatic systems) are involved.
However, by disclosing estimation uncertainty, which is often interpreted as a proxy for
risk, preparers can still provide information that is accurate and faithfully representative.

For example, say a company based in Germany decides to disclose its energy
consumption, including the percentage of energy consumed from renewable sources. In
Germany, local utilities are subject to renewable portfolio standards, which requires a
certain percentage of electricity sold by utilities to come from renewables. Specifically,
Germany seeks to produce 80% of its electricity from renewables by 2030.156 Public policy
specifies the pace at which renewable energy production is to be expanded over time.
However, renewable energy sources like solar and wind are dependent on natural elements
that can vary considerably over time, so estimating the exact energy output from renewable
sources in a given period requires assumptions and models based on historical data, which
introduces uncertainty that is passed down to the company when calculating the amount
of energy it consumes from renewable sources. Where preparers communicate the source
and degree of uncertainty in its measure of renewable electricity consumption, users can
interpret how precise that data is, which helps inform their assessment of the possible
financial implications associated with the company’s energy management.

9.5.1.2. Defining ‘comparability,’ ‘verifiability,’ ‘timeliness’ and ‘understandability’

3. Comparability: Comparability allows users to identify similarities and differences in what
they are evaluating. Notably, comparability does not require companies to report the same
information. For instance, it may not be particularly useful for online banking companies to
disclose information related to fleet fuel efficiency. However, when companies do report
the same cross-industry information and industry-specific sustainability-related risks and
opportunities, comparability can be enhanced if preparers use the same methods, units
of and time periods to produce their disclosures. With comparable data, users are able
to evaluate a company against its own past performance and against other companies
(particularly those that operate in the same industry or have similar activities) in order to
choose between alternatives.

For example, say two companies in the Metals & Mining industry report on the topic of
workforce health and safety. One company reports its total number of employee injuries.
The other company reports its average hours of health, safety, and emergency response
training as well as the number of total employee fatalities. This information is not comparable
because the companies are using different metrics to measure performance.
4. Verifiability: Verifiability gives users confidence that information is complete, neutral and
accurate. In general, information is verifiable if various independent observers, including
assurers, could reach consensus that a particular piece of information represents the

156 Federal Ministry of Justice and Federal Office for Justice, ‘Gesetz für den Ausbau erneuerbarer Energien (Erneuerbare Energien-
Gesetz—EEG 2023),’ 22 May 2023.

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sustainability-related risk or opportunity it relates to. It is a function of the processes used

to generate information and the controls around those processes, so that others can
confirm that either a piece of information is accurate and/or the inputs used to generate
that information are accurate.

Verifiability can be assessed by whether information can be linked to a trustworthy source,

contradicts other available information or is supported by documentation. For example,
consider a company in the Appliance Manufacturing industry that claims its products
meet certain environmental criteria, including in-use energy efficiency and standby
power consumption. In this case, verifiable information refers to specific data that can be
objectively tested and validated.
5. Timeliness: Sustainability information is timely if it is made available to users in time to influence
their decisions. In general, the older the information, the less useful it is. However, some
information may continue to be timely long after the end of a reporting period. For instance,
users may seek to assess progress or patterns in company performance over time, or historical
context might be relevant to understanding a company’s present decisions and position.
6. Understandability: Sustainability information is understandable if it is clear and concise.
In general, disclosures are concise when they avoid generic or ‘boilerplate’ information that
is not specific to the company, avoid immaterial information, avoid unnecessary duplication
and use clearly structured sentences and paragraphs. Understandability is also a matter
of coherence, where sustainability information is presented in a way that allows users to
relate it to the company’s financial statements.157
The above four enhancing characteristics—comparability, verifiability, timeliness and
understandability—support the decision usefulness of information that is relevant and faithfully
represented. Consider the disclosure excerpts in the figure below.
Figure 14—Levels of disclosure specificity

SECTOR: RESOURCE TRANSFORMATION

INDUSTRY: CHEMICALS
TOPIC: GREENHOUSE GAS EMISSIONS

Least useful Most useful

‘Proposed and existing ‘Continuous improvement ‘Gross global Scope 1 emis-

governmental laws and regu- in energy efficiency at manu- sions: 411,079 MT CO2e. In 2019,
lations relating to greenhouse facturing facilities along with we reduced our greenhouse gas
gas and other air emissions may manufacturing of products that emissions on an intensity basis
subject certain of our operations help to improve efficiency are by 15% from our 2015 baseline,
and customers to significant new incremental to [ensure access to exceeding our goal to achieve a
costs and restrictions on their affordable, reliable, sustainable 10% reduction one year early…
operations and may reduce sales and modern energy for all]. We, The key drivers for our emissions
of our products.’158 at FFC, are continuously striving reductions are renewable elec-
to improve energy efficiency tricity purchases in Europe and
by continuously upgrading our increased overall water efficiency.
plants. Our target of reducing Because we use less water in
2% energy consumption by 2020 our operations, we also use less
from 2014 level demonstrates energy, reducing our greenhouse
our ambition to energy efficiency gas emissions.’160
and reduction in associated GHG
emissions.’159

157 IFRS S1, Appendix D: Qualitative characteristics of useful sustainability-related financial information, paragraph D1–D33, June 2023.
158 LSB Industries, Inc., Annual Report, 2019.
159 Fauji Fertilizer Company Limited, Annual Report of Fauji Fertilizer Limited, 31 December 2019.
160 Ecolab, Corporate Responsibility GRI Report, 2019.
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Without standards, even when companies do report sustainability information, it is often

presented in vague or generic ways. With standards, the usefulness of a statement increases
as it becomes more specific. Consider the leftmost example above, which contains boilerplate
language. Though it may technically be timely, it is not comparable nor does it do much to enhance
understanding. On the other hand, the center example, which offers a more tailored narrative, is
verifiable (i.e., contains data that can be assured), timely and understandable. More useful still,
the right-most example is comparable (assuming other companies use the same method and
period to calculate gross global Scope 1 emissions), verifiable, timely and understandable. In the
absence of standards, investors are often challenged to make informed decisions with inconsistent
and incomplete information. Indeed, research shows that when a topic is not effectively disclosed
using a tailored narrative and metrics, and instead is buried underneath boilerplate language,
investors have less certainty about its impact on valuation and therefore its risk to shareholders.161

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):

7 RECALL the inaugural goals of the ISSB and the characteristics of useful
sustainability-related financial information.

? CHECK YOUR UNDERSTANDING

1. What were the inaugural goals of the ISSB?

2. What is the primary objective of the IFRS Sustainability Disclosure Standards?

3. W
 hat are the qualitative characteristics of useful sustainability-related financial
information?

JUMP TO ANSWERS

161 Ole-Kristian Hope, Danqi Hu, and Hai Lu, ‘The Benefits of Specific Risk-Factor Disclosures (working paper, University of Toronto, 25
February 2016).

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THE IFRS
SUSTAINABILITY
DISCLOSURE
STANDARDS
10
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:
8 RECALL the core content, conceptual foundations and sources of guidance of
the IFRS Sustainability Disclosure Standards.

10 DISCERN the implications of the Sustainability Industry Classification System®

(SICS®).

With an understanding of the goals that first shaped the IFRS Sustainability Disclosure
Standards and the characteristics of useful sustainability-related financial information (what the
Standards are designed to achieve), it is now time to dig into the features of the Standards them-
selves (how they are designed to achieve the goals). Note that the following chapter is not intended
to provide guidance on how to apply or interpret the Standards, nor does it cover every detail of
the Standards. Rather, it explains the rationale behind the primary components of the Standards
and further explores their conceptual underpinnings.
The International Sustainability Standards Board published its first standards in June 2023:

• IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information;

and

• IFRS S2: Climate-related Disclosures

IFRS S1 is the foundation of the IFRS Sustainability Disclosure Standards. It sets out the
requirements for the disclosure of sustainability-related financial information. In other words, it sets
the rules that apply to all IFRS Sustainability Disclosure Standards, defining what information must
be disclosed and how to disclose it. No IFRS Sustainability Disclosure Standard can be applied
without IFRS S1.
IFRS S2 provides requirements specifically for the disclosure of climate-related risks and
opportunities. As evidenced by many global reporting and policy objectives focused on climate
and the ‘climate-first’ disclosure approach discussed in Section 8.3.1., companies and investors
urgently need tools and information to assess the impacts of climate on business models, value
chains and future cash flows. In the future, the ISSB will issue additional guidance to support
company efforts to disclose material information on sustainability-related risks and opportunities
to investors.
This structure—a foundational standard accompanied by additional, subject-matter-specific

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standards—mirrors that of the IFRS Accounting Standards. The IFRS Accounting Standard IAS
1: Presentation of Financial Statements sets out the overall requirements for the presentation of
financial statements, including their content and applicable concepts, while additional standards
such as IFRS 3: Business Combinations and IFRS 16: Leases: Statement of Cash Flows, detail
requirements for specialized subjects of disclosure where those subjects necessitate their own
additional standards.
For the purpose of this curriculum, the remainder of the chapter focuses primarily on the
features of IFRS S1. As it contains general requirements, the contents of IFRS S1 serve as the
foundation for understanding all IFRS Sustainability Disclosure Standards.

10.1. CORE CONTENT

The core content areas of the IFRS Sustainability Disclosure Standards are derived directly
from and built on the four pillars of the TCFD Framework. Under the Standards, companies are
required to disclose information about their governance, strategy, risk management, and metrics
and targets.
1. Governance refers to the processes, controls, and procedures a company uses to
monitor and manage sustainability-related risks and opportunities. The goal is to provide
users with an understanding of how a company’s board and management are involved in
addressing sustainability-related risks and opportunities. This includes information about
how responsibilities for sustainability-related risks and opportunities are reflected in role
descriptions and incorporated into governance and management processes. For instance,
under the pillar of governance, companies may disclose information about their board-
level sustainability committee and how sustainability-related risks and opportunities are
considered in strategy discussions and portfolio reviews.162
2. Strategy refers to the approach a company takes to manage sustainability-related risks
and opportunities. The goal is to provide users with an understanding of the specific
sustainability risks and opportunities that are relevant to performance and prospects; their
anticipated effects on the company’s position, performance, and cash flows over the short,
medium, and long term; and how those risks and opportunities have been factored into
financial planning. This includes information about how sustainability-related risks and
opportunities effect a company’s business model and value chain, as well as information
about how the company has responded to (or will respond to) these sustainability-
related risks, and provides users with an understanding its resilience and capacity to
adjust to uncertainties. For instance, under the pillar of Strategy, preparers may disclose
information related to their decision and approach to reducing negative environmental
impacts associated with product packaging throughout the lifecycle, and how that decision
is expected to affect financial performance in the short and long term.163
3. Risk management refers to the processes used to identify, assess, prioritize and monitor
sustainability-related risks and opportunities. The goal of this content area is to enable
users to assess a company’s overall risk profile and to lend insight into the processes used
to manage those risks. This includes information about any parameters a company uses to

162 IFRS S1, paragraph 26-27.

163 IFRS S1, paragraph 28-40.

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identify and manage sustainability-related risks, how it prioritizes sustainability-related risk

relative to other types of risk, whether and how it uses scenario analysis, how it assesses
the nature, likelihood, and magnitude of the effects of specific sustainability issues, as
well as other information. For instance, under the risk management pillar, preparers may
disclose information about how they’ve integrated sustainability-related financial information
into the company’s enterprise risk management system, the specific threats associated with
risks that have been identified and its approach to managing those threats.164
4. Metrics and targets are necessary to understand a company’s performance in relation
to sustainability-related risks and opportunities. This may include metrics associated with
a specific risk or opportunity (such as kilograms of food waste generated and diverted) or
it may include progress toward any targets the company has set or is required to meet by
law or regulation (such as progress toward a net zero emissions target or targets requiring
consumer goods to be manufactured using a certain percentage of recycled materials).
The goal is to provide users with measurable information for each sustainability-related
risk and opportunity relevant to financial performance, as well as information to assess
progress achieved against targets. This includes metrics that are required by an IFRS
Sustainability Disclosure Standard (such as IFRS S2) and can include metrics developed
by the company itself accompanied by an appropriate explanation of each metric. Notably,
IFRS S1 specifies that metrics disclosed by a company need to include industry-specific
information.165

10.2. CONCEPTUAL FOUNDATIONS

Four concepts underpin all disclosures produced using the IFRS Sustainability Disclosure
Standards. They are:

• Fair presentation;

• Materiality;

• Reporting entity; and

• Connected information
Combined, these concepts provide a coherent basis for preparing sustainability-related finan-
cial disclosures and help ensure consistency and clarity in reporting across different industries
and regions, while also aiding in the interpretation and application of the Standards by investors.

10.2.1. FAIR PRESENTATION

In financial disclosure, fair presentation requires preparers to depict financial information in a
way that completely and accurately reflects the financial position and performance of a company.
In sustainability-related financial disclosure, the same is true. Fair presentation requires disclosure
of all sustainability-related risks and opportunities that could reasonably be expected to affect a
company’s financial position, financial performance and prospects.
Notably, the concept of faithful representation, discussed in Section 9.5.1.1., is an important

164 IFRS S1, paragraph 43-44.

165 IFRS S1, paragraph 45-53.

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component of fair presentation, but they are distinct concepts. Fair presentation is more broadly
concerned with the overall quality of a report and a company’s ability to provide a complete set of
sustainability-related financial disclosures, while faithful representation is more concerned with a
company’s ability to adequately depict a specific risk or opportunity. For example, to assess fair
presentation, one would look at the entire set of a company’s disclosures to see if it has presented
all sustainability-related risks and opportunities, and if information about those risks and oppor-
tunities is comparable, verifiable, timely and understandable. To assess faithful representation,
on the other hand, one would look at the information provided for a specific risk or opportunity to
determine if the information provided represents what it purports to represent.
Fair presentation might also require preparers to look beyond the IFRS Sustainability
Disclosure Standards. In some cases, the Standards may be insufficient to provide investors with a
complete understanding of a company’s performance and prospects. In this way preparers have a
responsibility to disclose additional information beyond the requirements of the IFRS Sustainability
Disclosure Standards if necessary to provide a complete, neutral and accurate depiction of the
firm’s risks and opportunities.

10.2.2. MATERIALITY
As discussed in Chapters 3 and 7, materiality forms the basis of all disclosure decisions
and is supported by the guidance provided in the Standards. The IFRS Sustainability Disclosure
Standards use the same definition of investor-focused materiality applied to financial statements.
Preparers, when applying the requirements of the Standards, must use the concept of materiality
to decide what to disclose (and what not to disclose) to ensure they provide information that is
reasonably likely to influence investor decisions.
This emphasis on investor-focused materiality can add value to existing reporting practices
used to assess companies’ financial position, performance and prospects. It offers a focused view
of business-critical issues, helping address the problem of ‘disclosure overload’ and raising the
signal-to-noise ratio for investors. Alongside financial statements, it helps surface the sustainability
information that is most useful for management. Investor-focused materiality also supports cost-ef-
fective disclosure by requiring companies to disclose only that information which could reasonably
be expected to affect company prospects—it does not require companies to disclose additional
information that is not of use to the company and its investors.

10.2.3. REPORTING ENTITY

When preparing financial statements, companies must determine the boundary of the report-
ing entity—the organization or part(s) of an organization for which the statements are prepared.
Doing so helps users understand the specific entity the information pertains to, and is necessary
to generate consistent, comparable information over time.
Companies, which can be large, complex organizations, determine the scope of their disclo-
sure based on the information investors need to make decisions about providing capital to a
company and whether it has efficiently and effectively used its resources. It can be a single entity
(such as a parent company), a portion of an entity (such as a subsidiary) or more than one entity
(such as multiple subsidiaries under the same ownership). For example, large multinationals often
have divisions in multiple industries. Samsung is a multinational that provides consumer electron-
ics and appliances. It has two primary divisions (finished products and components) and over

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230 subsidiaries across those divisions.166 Samsung publishes consolidated financial statements
covering all divisions and subsidiaries. General Electric (GE), also a multinational, operates divi-
sions across multiple industries including healthcare, aviation, renewable energy and others. It
provides unconsolidated statements for many of its subsidiaries (e.g., for GE HealthCare, GE
Aerospace, etc.) as well as financial statements that reflect the combined performance of several
divisions. The unconsolidated statements provide investors with a more detailed view of finan-
cial performance for a specific entity or business segment that is not available at the aggregate
level. Companies may draw their reporting boundary differently depending on the structure of the
company and the level of information required by investors.
In IFRS S1, the ISSB defines the reporting entity for sustainability-related financial disclosures
as the same entity for which financial statements are being prepared. This helps to ensure that the
sustainability information being communicated will be aligned and consistent with the information
being communicated in the financial statements.

10.2.4. CONNECTED INFORMATION

To simply have sustainability-related financial disclosures and financial statements presented
in the same reporting package does not necessarily ensure that companies and investors gain
a holistic picture of financial performance. For example, the annual quantities of air pollutants a
company emits can be more useful to investors if they are not only disclosed but also accompa-
nied by enough context to understand how they connect to a company’s strategic planning and
to how the company expects management of those pollutants to affect its current and future finan-
cial performance. To gain a comprehensive understanding of companies’ financial performance
and prosects, one must also have insight into the connections between the items to which the
information relates (for instance, how sustainability-related risks are expected to affect financial
position) and the connections between disclosures (for instance, within sustainability-related finan-
cial disclosures, how a strategic decision is reflected in quantitative metrics; or across general
purpose financial reports, how strategic decisions related to sustainability connect to the income
statement).
For example, say Company A—a road transportation company that manages a sizable vehi-
cle fleet—operates in an area with increasingly stringent air quality regulation. It would be useful
for investors to receive not only emissions data but also to know, for example, that the company
invested in replacement equipment that greatly reduces the emission of harmful pollutants and
reduces fuel costs. The company incurs initial capital expenditures but expects long-term savings
and faces considerably less risk related to regulatory enforcement. Annual quantities of specific
air pollutants become useful when the disclosure depicts the relationship between the emissions,
the company’s strategic decisions and the resulting changes to its balance sheet and income
statement.
The IFRS Sustainability Disclosure Standards are therefore designed to support companies
in producing connected information. With connected financial reporting and sustainability-related
financial reporting, companies and their investors can gain an understanding of performance
and prospects that is more holistic and complete than that gained from sustainability reports or
financial reports alone.

166 Samsung Electronics Co., Ltd. and its Subsidiaries, NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, 30 June 2023.

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10.3. DETERMINING WHAT INFORMATION TO DISCLOSE

As discussed in Section 9.5.1.1., the usefulness of information is in part a function of how
complete it is. Companies and investors benefit from an awareness and understanding of all the
sustainability-related risks and opportunities that could reasonably affect performance and pros-
pects. When it comes to sustainability-related financial information, identifying what information
to report is a matter of identifying material information. As discussed in Section 7.2., this involves
two steps:
1. Identifying the sustainability-related risks and opportunities that could reasonably affect a
company’s prospects (such as energy management or workforce health and safety); and
2. Identifying applicable disclosure requirements, meaning the quantitative and qualitative
information associated with each risk or and opportunity (such as total energy consumed
and percentage of renewable energy consumed, or total recordable incident rate [TRIR]
for full-time employees).

10.3.1. SOURCES OF GUIDANCE

IFRS Sustainability Disclosure Standards, such as IFRS S2, provide more detailed and specific
disclosure requirements (subject to materiality judgments). For example, IFRS S2 asks companies
to disclose certain metrics relevant to understanding the company’s physical and transition risk
related to climate. But remember, ultimately companies decide what to disclose, and most compa-
nies are affected by sustainability-related risk and opportunities beyond the domain of climate.
In the absence of an IFRS Sustainability Disclosure Standard for specific, non-climate related
risks and opportunities, IFRS S1 includes sources of guidance, or specific resources that prepar-
ers can refer to outside the IFRS Sustainability Disclosure Standards themselves. These sources
of guidance exist to support preparers in identifying relevant risks and opportunities and associ-
ated material information across the universe of sustainability matters. As the IFRS Sustainability
Disclosure Standards are developed further, these sources of guidance will be directly integrated
into additional IFRS Sustainability Disclosure Standards and cease to exist as supplements. For
now, they are designed to fit within the two-step process for identifying material information. For
each step, the IFRS Sustainability Disclosure Standards provide required and optional sources
of guidance:
1. To identify sustainability-related risks and opportunities, preparers are required to refer to
and consider the applicability of the SASB Standards to comply with the IFRS Sustainability
Disclosure Standards. Preparers are permitted, but not required, to refer to the CDSB
Framework Application Guidance, the materials of other investor-focused standard-setters
and industry practice.
2. To identify which information associated with a sustainability-related risk or opportunity
to disclose, the same rules apply. Preparers are required to refer to and consider the
applicability of the SASB Standards and are permitted to refer to the CDSB Framework
Application Guidance, the materials of other investor-focused standard-setters and industry
practice. In addition, preparers are permitted to refer to the European Sustainability
Reporting Standards (ESRS) and Global Reporting Initiative (GRI) Standards.

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Figure 15—Required and optional sources of guidance

SASB Standards Required

Materials from
CDSB Framework
Industry Practice investor-focused
Application Guidance
standard setters
Optional

ESRS GRI Standards

Used to identify sustainability-related risks/opportunities (Step 1) and the material

information related to them (Step 2)
Used to identify material information related to pre-identified sustainability-related
risks and opportunities (Step 2)

To understand how and why these sources of guidance support disclosure using the IFRS
Sustainability Disclosure Standards, one must first understand what each resource is.

10.3.1.1. Required sources of guidance: the SASB Standards

Recall in Section 6.3. that disclosure topics and metrics help make frameworks actionable
by providing sustainability-related financial data in line with overarching topic areas. In this same
way, the SASB Standards help satisfy the requirement to disclose industry-specific metrics and
targets while providing consistent, comparable information related to governance, strategy and
risk management.
The SASB Standards thus serve as the industry-based guidance for climate disclosures and
a starting point for identifying the information that must be included in companies’ disclosures
beyond climate. This does not mean that companies applying ISSB Standards are obligated
to disclose information using the SASB Standards. Rather, they must consider (1) if the indus-
try-specific disclosure topics within the SASB Standards are reasonably likely to affect its ability
to generate cash flows and (2), if so, if the metrics provided by the Standards related to each topic
constitute material information. The structure of the SASB Standards directly supports disclosure
using the two-step process for identifying material information.

10.3.1.1.1. Structure of the SASB Standards

The SASB Standards rely on the Sustainable Industry Classification System (SICS®) and are
thus organized according to 11 sectors composed of 77 industries. Five sustainability dimensions
serve as a high-level organizing structure for the topics covered in the SASB Standards. They
include:

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1. Environment;
2. Social Capital;
3. Human Capital;
4. Business Model and Innovation; and
5. Leadership and Governance.
These five sustainability dimensions are further defined by a subset of industry-agnostic
General Issue Categories (GICs).

Figure 16—Structure of SASB Standards

EXAMPLES

SECTORS Health Care

Sectors and Industries
are based on SASB’s
Sustainable Industry
Classification System
Biotechnology &
(SICS)®. INDUSTRIES Pharmaceuticals

Sustainability Dimensions are broad

sustainability themes, including Environment, SUSTAINABILITY Social Capital
Social Capital, Human Capital, Business Model DIMENSIONS
& Innovation, and Leadership & Governance.

General Issue Categories (G.I.C.) are industry-

agnostic and cross-cutting themes that allow
GENERAL ISSUE Customer Welfare
comparisons across sectors/industries. CATEGORIES

Disclosure Topics are the industry-specific and

tailored versions of the G.I.C.s that are reasonably DISCLOSURE Counterfeit Drugs
likely to have financially material impacts on TOPICS
companies participating in an industry.
HC-BP-260a.1: HC-BP-260a.2: HC-BP-260a.3:
Metrics are quantitative and qualitative indicators created Description of methods Discussion of process Number of actions
to measure performance on each disclosure topic. Technical METRICS and technologies used for alerting customers that led to raids,
to maintain traceability and business partners seizure, arrests, and/
protocols exist for each metric.
of products throughout of potential or known or filing of criminal
the supply chain and risks associated with charges related to
prevent counterfeiting counterfeit products counterfeit products

10.3.1.1.2. Components of a SASB Standards

Each SASB Standard contains;
1. an industry description;
2. disclosure topics for that industry;
3. metrics for each disclosure topic; and
4. technical protocols that describe how to properly capture and disclose metrics.

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Figure 17—Components of a SASB Standard

1. INDUSTRY DESCRIPTIONS
Industry descriptions help companies and investors identify applicable SASB Standards by
describing the business models, activities and other common features that characterize partici-
pation in the industry. Industries are defined on a pure-play basis, meaning they focus exclusively
on a particular market, product, or service. For example, the Hotels & Lodging industry is defined
according to companies that provide overnight accommodation, including hotels, motels and inns.
Some companies may have business units and activities that span more than one industry, in
which case they would rely on the guidance provided for multiple industries. For instance, a food
and beverage company with product lines for snack foods and bottled teas would likely refer to
guidance for both the Processed Foods and Non-Alcoholic Beverage industry.

2. DISCLOSURE TOPICS
Disclosure topics describe specific sustainability-related risks or opportunities associated
with the activities of companies within a particular industry. For example, companies in the
Non-Alcoholic Beverages industry often manage global supply chains to source a wide range
of ingredients. How companies screen, monitor and engage with suppliers on environmen-
tal and social topics affects their ability to secure supplies and manage price fluctuations. So,
Environmental and Social Impacts of Ingredient Supply Chains is included as a disclosure topic
for this industry.
On average, each SASB Standard has six disclosure topics, though some have as few as two
topics per industry or as many as 12 topics. Across all 77 industries, there are hundreds of disclo-
sure topics. Each disclosure topic is extensively evaluated for its ability to meet specific criteria
for inclusion in a SASB Standard, including for evidence of financial impact.

Linked to financial impact

Sustainability-related risks and opportunities can impact financial performance in very specific
ways that vary by topic and industry. One might affect revenues, another might be tied to costs

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and a third might impact asset value. All disclosure topics are directly linked to one or more of the
following financial drivers: revenues and costs, assets and liabilities, and/or cost of capital.

Figure 18—Financial drivers linked to disclosure topics

Within the SASB Standards, these drivers are broken down into more specific financial effects that
mirror the way mainstream analysts and investors value corporations, thus allowing sustainability
information produced using the Standards to be plugged into a range of tools and models for
financial analysis. For example, failure to ensure drug safety in the Biotechnology &
Pharmaceuticals industry (the disclosure topic Drug Safety) can negatively impact shareholder
value. Problems relating to drug safety and side effects can reduce planned revenues and cash
flows, impacting profits and potentially raising the cost of capital. In addition, diminished brand
reputation, potential litigation, settlement costs, and fines can present significant liabilities. While
each company’s circumstances are different and actual financial effects should be evaluated in
context, the explicit links between disclosure topics and specific channels of financial impact help
produce decision-useful information.

Characterized by nature, likelihood, and magnitude

Disclosure topics tend to be associated with certain characteristics based on the nature, like-
lihood and magnitude of the effects of the risk or opportunity at hand, which directly influence the
financial effects associated with the topic. For instance, sustainability-related risks and opportuni-
ties can be acute or chronic. They may already be occurring or have a high likelihood of occurring
in the near, medium or long term. The associated effects may be low magnitude, high magnitude
or somewhere in between.
Acute risks and opportunities correspond to events that are rare or unlikely but can have
high magnitude effects in the near term. Risks may include events related to extreme weather,
unanticipated spills or accidents, financial collapse from systemic risk or other sudden events.
For example, properties located in regions subject to extreme weather and flooding are at risk
of property damage, which can harm asset value and lead to extraordinary expenses to restore
properties. Therefore, the disclosure topic Climate Change Adaptation in the Real Estate indus-
try tends to be associated with acute risk. Acute opportunities are less common but may include
actions by a company to capture a new market through innovation.
Chronic risks and opportunities exhibit lower magnitude effects in a given year but are endur-
ing and can erode (or bolster) a company’s financial position and performance over time. For
example, as the market for electric vehicles grows and more industries move toward clean energy
production and storage, the price of lithium—a critical material for lithium-ion batteries— may

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continue to rise, representing a chronic risk to electronic vehicle manufacturers. On the other hand,
energy-efficient chemical production in the Chemicals industry may present a lasting opportunity
to companies. Both of these disclosure topics (Materials Sourcing and Energy Management) are
tied to costs that companies manage every day.
Of course, the nature, likelihood and magnitude of the effects of sustainability-related risks
and opportunities depend on the company and the environment it operates in. However, the
descriptions provided in the SASB Standard can serve as a useful starting point. By evaluating
the nature, likelihood and magnitude of effects, companies can determine which sustainability-re-
lated risks and opportunities to disclose, and investors can gain useful information to support
decision-making.

3. METRICS
Each SASB Standard contains metrics that are designed to, either individually or as part of a
set, provide useful information on a company’s performance for a specific disclosure topic.
Metrics related to specific disclosure topics can be quantitative or qualitative—they help
produce sustainability disclosures that deliver both quantitative information on performance and
qualitative context needed to accurately interpret performance. In some cases, qualitative metrics
are the best way to provide decision-useful sustainability information. Quantitative information
alone might not provide useful insight into future performance. Consider a company in the Software
& IT Services industry reporting on data security. The company discloses very few data breaches
and corrective actions. These numbers may be the result of robust security and company respon-
siveness, or they may be due to a lack of significant attempted threats from third-party actors. In
this case, report users would benefit from qualitative information about the company’s approach
to data security risks, including cybersecurity risk-management standards implemented, trends
in the type or origin of attacks, employee training and other qualitative information.
The SASB Standards also include activity metrics that capture the scale of specific activities
or operations. They are used in conjunction with other metrics to normalize data and facilitate
comparison. Activity metrics are typically operational data, such as the total number of employees
or quantity of products produced. Activity metrics may also include industry-specific data, such
as plant capacity utilization or hospital-bed days. Activity metrics are always quantitative.

4. TECHNICAL PROTOCOLS
Each metric is accompanied by a technical protocol, which provides guidance on defini-
tions, scope, implementation and presentation for the associated metric. This detailed guidance
supports preparers when producing metrics. Users may also reference the technical protocols to
gain clarity on the scope of certain metrics.
The protocols help ensure disclosures from companies in the same industry are as compara-
ble as possible. Without protocols on how to collect data and calculate metrics, two companies
could use two substantially different methodologies, undermining the true comparability of the
information. In addition, technical protocols are intended to constitute suitable criteria for third-
party assurance, thus ensuring the verifiability of reported information.
Below is an excerpt from the Engineering & Construction Services industry. Companies in
the Engineering & Construction Services industry provide engineering, construction, design,
consulting, contracting and other related services that support various building and infrastructure

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projects.

10.3.1.1.3. The Sustainable Industry Classification System (SICS)

To meet the needs of investors and support standards development, the Sustainability
Accounting Standards Board developed a unique industry classification system called the
Sustainable Industry Classification System (SICS) when the SASB Standards were originally
developed.
The most commonly used industry classification systems, such as the Global Industry
Classification Standard (GICS), the Bloomberg Industry Classification System (BICS) and the
Industry Classification Benchmark (ICB), use financial concepts such as sources of revenue
to assign companies to a given industry or sector. As such, they are not designed to group
companies together on the basis of having exposure to similar sustainability-related risks and
opportunities.
For example, GICS identifies five industries related to the ‘Technology Hardware and
Equipment sector,’ including communications equipment companies, technology hardware
companies and electronic equipment companies. Although these industries differ in finan-
cial characteristics, they produce similar products and face similar regulatory environments.
Such a granular industry classification would create overlap and repetition between the indus-
try sustainability disclosure standards. With SICS, these types of companies all belong to one
industry—Hardware.
On the other hand, GICS identifies the Oil, Gas and Consumable Fuels industry, which
includes oil and gas exploration companies as well as oil and gas refining and marketing compa-
nies. Through the lens of sustainability-related risks and opportunities, these companies have
very different characteristics, so investors are likely to benefit from different disclosures. SICS thus
separates oil and gas companies into four distinct industries: Exploration & Production, Midstream,
Refining & Marketing and Services. To group industries based on their sustainability-related risks
and opportunities, SASB developed SICS. Where other traditional classification systems take
either a supply-side, production-oriented approach or a demand-side, market-oriented approach
to classifying companies, SICS uses a methodology focused on impacts from risks and oppor-
tunities, which can have implications for either side. It builds on and complements traditional
classification systems by grouping companies into industries based on their value creation model,
their resource intensity and sustainability impacts, and their sustainability innovation potential.
Using a sustainability-based industry classification helps surface the disclosure topics that are
likely to impact all or most companies in an industry. Within a SICS industry, companies tend to:

• have similar business models;

• face similar growth and innovation opportunities;

• operate in the same legal environment;

• rely on similar resources;

• produce comparable products and services; and

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• have comparable impacts on society and the environment.167

Just as a price-to-earnings ratio is assessed in the industry context (since different industries
have different norms for this ratio), it can be extremely useful to analyze sustainability data, such
as carbon emissions or employee safety, in an industry context. By grouping topics and metrics
by industry, companies can focus on collecting and reporting the information most relevant to
their business model and corresponding sustainability risks and opportunities, reducing the cost
burden of reporting by narrowing disclosure scope to the most relevant information. Industry spec-
ificity supports decision-usefulness by structuring disclosure into the information most relevant to
financial analysis and focusing on industry-specific drivers of financial performance.
In some instances a company may determine that the industries, disclosure topics and metrics
provided by the SASB Standards are not suitable to its business or that additional disclosure
topics and metrics not identified in the SASB Standards are needed to provide complete disclo-
sure given its unique context and operating model. In these cases, preparers are permitted (but
not required) to use optional guidance as long as it does not conflict with the requirements of the
IFRS Sustainability Disclosure Standards or obscure material information.

10.3.1.2. Optional sources of guidance

As mentioned above, to identify sustainability-related risks and opportunities (Step 1) and
determine what information to disclose related to those risks and opportunities (Step 2), preparers
have the option to refer to:

• the CDSB Framework Application Guidance;

• the materials of other investor-focused standard-setters; and

• industry practice to identify sustainability-related risks and opportunities and associated

material information.
The CDSB Framework Application Guidance: This resource contains guidance for both
water-related disclosures and for biodiversity-related disclosures. Notably, the CDSB Framework
Application Guidance relies on what were originally the four pillars of the TCFD Framework
(governance, strategy, risk management, and metrics and targets) and was originally designed to
integrate water and biodiversity-related disclosure with financial statements.
The materials of investor-focused standard-setters: Just as jurisdictional financial account-
ing standard setters sometimes continue to develop and set requirements for reporting companies
in addition to the IFRS Accounting Standards, the same will likely be true for sustainability-related
financial disclosure. Where the sustainability disclosure requirements of other standard-setting
bodies are designed to meet the information needs of investors, the materials issued by these
standard setters can be used to guide disclosure decisions.
Industry practice: The reporting practices of peer companies within an industry can serve
as a reliable indication of which sustainability-related risks and opportunities are relevant to a
company’s financial performance and prospects. Industry practice may be a matter of voluntary
disclosure, where peer companies have independently decided to report information related to

167 Robert G. Eccles, Michael P. Krzus, Jean Rogers and George Serafeim, ‘The Need for Sector-Specific Materiality and Sustainability
Reporting Standards,’ Journal of Applied Corporate Finance 24, no. 2 (2012): p. 71.

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specific sustainability-related risks or opportunities. It can also be influenced by industry associa-

tions, where industry associations encourage the disclosure of specific sustainability-related risks
and opportunities as a matter of establishing best practices. For instance, a company in the Drug
Retailers industry might see that its competitor is reporting information related to supply chain
integrity, including its strategy for reducing the occurrence of compromised drugs within its supply
chain. The company may then conduct its own analysis and determine that supply chain integrity
is also relevant to its financial performance and prospects. Or, seeing that incidents related to
compromised drugs are harming the reputation of and capital flows to the Drug Retailers industry
as a whole, an industry association may release guidance to companies encouraging disclosure
related to the issue. Regardless of motivation behind certain industry disclosure practices, the
IFRS Sustainability Disclosure Standards allow preparers to use industry practice to guide disclo-
sure decisions.
In addition to these three resources, preparers can also refer to the ESRS and the GRI
Standards to satisfy the second step of identifying material information. As discussed in Chapter
7, the ESRS and GRI Standards are not designed to exclusively meet the information needs of
investors. GRI is focused on impact materiality while ESRS covers both financial and impact
materiality. So, IFRS S1 does not point to these standards to identify which sustainability-related
risk and opportunities could reasonably be expected to affect a company’s prospects. However,
companies that use the GRI and/or ESRS Standards can use specific information (e.g., metrics)
prepared under those standards to the extent that it would meet investor needs.

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
8 RECALL the core content, conceptual foundations and sources of guidance of
the IFRS Sustainability Disclosure Standards.

10 DISCERN the implications of the Sustainability Industry Classification System®

(SICS®).

? CHECK YOUR UNDERSTANDING

1.  hat are the four core content areas of the IFRS Sustainability Disclosure Standards?
W
What information does each area include?

2. What are the IFRS Sustainability Disclosure Standards sources of guidance?

3. What are the components of a SASB Standard?

4. W
 hat is the Sustainable Industry Classification System (SICS) and how does it differ
from traditional industry classifications?

JUMP TO ANSWERS

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SETTING IFRS
SUSTAINABILITY
DISCLOSURE
STANDARDS
11
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:
9 RECOGNIZE the ISSB’s standard-setting process, including the processes
originally used to develop the SASB Standards and TCFD Recommendations.

The ISSB follows a rigorous, transparent, multi-stakeholder process to develop its standards.
The following chapter provides an overview of this process, lending insight into the core principles
and steps that define it. In addition, this chapter provides background on the processes used to
develop the SASB Standards and TCFD Recommendations.

11.1. THE STRUCTURE OF THE IFRS FOUNDATION

To understand how the Standards were developed, it is first useful to be familiar with the struc-
ture of the IFRS Foundation. The IASB and ISSB are supported by robust governance procedures
1
to ensure their Standards, which are developed in the public interest, are high-quality, understand-
able, enforceable and globally accepted.

Figure 19—Structure of the IFRS Foundation

Public accountability IFRS Foundation Monitoring Board

Governance, strategy, oversight IFRS Foundation Trustees

International Accounting International Sustainability

Independent standard-setting Standards Board (IASB) Standards Board (ISSB)

IFRS Interpretations Committee

When professionals talk about the IASB and ISSB, they are referring to two independent
groups of experts who are responsible for the development and publication of the IFRS Accounting
Standards and IFRS Sustainability Disclosure Standards, respectively. Board members are
selected from various geographies and have diverse experience in setting accounting standards;

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preparing, auditing and using reports; accounting education; corporate management and report-
ing; and investing. Board members are appointed by the IFRS Foundation Trustees through an
open and rigorous process. Each Board maintains full discretion to develop and pursue their
respective technical standard-setting agendas. The roster of IASB and ISSB members can be
found on the IFRS foundation website.
In addition to appointing IASB and ISSB members, The IFRS Foundation Trustees govern
and oversee the IFRS Foundation, including the IASB and ISSB and the operations that support
each Board. This includes establishing and maintaining operating procedures and due process,
overseeing organizational strategy, overseeing funding and assessing the effectiveness of the
IASB and ISSB. Trustees are not involved in technical matters related to the IFRS Standards,
meaning they do not dictate the content of the Standards or their publication. The Trustees are
accountable to the Monitoring Board of public authorities. A current list of all trustees is available
on the IFRS Foundation website.
The IFRS Foundation Monitoring Board provides oversight in that it ensures Trustees are
fulfilling their duties and is ultimately responsible for approving the appointment of Trustees. It
is comprised of capital markets authorities around the world and exists to enhance the public
accountability of the IFRS Foundation. Monitoring Board Members form the link between the
IFRS Foundation and their respective jurisdictions—they can bring jurisdictional insights to help
shape general purpose financial reporting (including sustainability-related financial disclosure)
and ultimately have oversight of and responsibility for whether and how the IFRS Standards are
incorporated into their jurisdictional requirements. Through their relationship with the Trustees, the
Monitoring Board is ‘able to more effectively carry out their mandates regarding investor protec-
tion, market integrity, and capital formation.’

As of 2023, members of the Monitoring Board include:

• the Board of the International Organization of Securities Commissions (IOSCO);
• the IOSCO Growth and Emerging Markets Committee;
• the Financial Services Agency of Japan (JFSA);
• the European Commission;
• the US Securities and Exchange Commission (SEC);
• the Comissão de Valores Mobiliários (CVM) of Brazil;
• the Financial Services Commission (FSC) of Korea;
• the Ministry of Finance of the People’s Republic of China;
• the Financial Conduct Authority (FCA) of the United Kingdom; and
• (observer) the Basel Committee on Banking Supervision.

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11.2. D
 EVELOPING THE FIRST IFRS SUSTAINABILITY
DISCLOSURE STANDARDS
The ISSB standard-setting process is closely modeled after the validated processes employed
by the IASB. However, establishing the ISSB’s standard-setting processes did not happen
overnight. Recall that one of the primary reasons for the formation of the ISSB is to simplify the
sustainability disclosure landscape—it exists to reduce fragmented disclosure guidance and the
associated complexities that add cost and risk to companies and investors. To achieve this aim,
the IFRS Sustainability Disclosure Standards incorporate and build off the trusted and established
work of existing sustainability disclosure standards and frameworks. Before the ISSB could set out
to develop its first standards, considerable work was first needed to begin to rationalize various
disclosure resources.

11.2.1. T
 HE BRIEF BUT IMPORTANT ROLE OF THE TECHNICAL READINESS WORKING
GROUP
After the IFRS Foundation announced the formation of the ISSB but before the Board was
fully assembled, the IFRS Foundation Trustees established the Technical Readiness Working
Group (TRWG) to ‘give the new board a running start’ by bringing together complementary inter-
national expertise from the relevant sustainability disclosure standards and frameworks with
the goal of providing recommendations to the ISSB. In some ways, the TRWG represented the
IFRS Foundation’s first major step to integrate and build on the work of relevant sustainability-fo-
cused disclosure initiatives. Notably, the TRWG was also a response to the urgent call from the
International Organization of Securities Commissions for the coordination of work to drive interna-
tional consistency of companies’ sustainability-related disclosures to investors.168
The organizations involved in the TRWG include:

• The International Accounting Standards Board (IASB);

• The Climate Disclosure Standards Board (CDSB);

• The Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures
(TCFD);

• The Value Reporting Foundation (previously the SASB Foundation and the International
Integrated Reporting Council [IIRC]); and

• The World Economic Forum (WEF) and its Measuring Stakeholder Capitalism Initiative.
The TRWG developed a set of deliverables, which included developing prototype standards
for the general and climate-related disclosure of sustainability-related financial information and
recommendations for other key operational and technical factors required for a functional Board.
This included due process characteristics, digitization strategy, connectivity between the IASB
and ISSB, and other items.
The prototype standards, published in November 2021, were not subject to due process
and not intended for use by preparers and users; however, they played the crucial role of provid-
ing the public with a direction of travel for the ISSB and directly informed what would ultimately

168 IOSCO, Media Release, ‘IOSCO sees an urgent need for globally consistent, comparable, and reliable sustainability disclosure
standards and announces its priorities and vision for a Sustainability Standards Board under the IFRS Foundation,’ 24 February
2021.

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become the first IFRS Sustainability Disclosure Standards. As stated upon prototype publication,
‘The prototypes build on decades of work by the TRWG’s individual member organisations, the
market-informed and market-tested tools and resources that have emerged from that work, and
the individual and collective expertise established through the development and implementation
of these widely embraced tools and resources.’169

11.2.2. THE ISSB STANDARD-SETTING PROCESS

Once established, the ISSB took the recommendations of the TRWG and endeavored to draft
the first two IFRS Sustainability Disclosure Standards using a rigorous, transparent due process
that prioritizes market feedback. Two major events punctuated the development of the first IFRS
Sustainability Disclosure Standards:

• In March 2022, the ISSB published two exposure drafts for public comment; one for
IFRS S1 and the other for IFRS S2. These exposure drafts constituted official proposals for
the first two Standards. During the 120-day consultation period, the ISSB received more
than 1,400 comments and conducted more than 400 outreach sessions. Post consultation
period, the Board processed and deliberated the feedback, which included the writing of
36 staff papers on specific topics and 10 public meetings to deliberate.

• In June 2023, after systematic and rigorous consultation and deliberation, the ISSB
published the final versions of IFRS S1 and S2 for companies to begin applying, including
an effective date of 1 January 2024.
The publication of the IFRS S1 and S2 exposure drafts and, ultimately, the Standards are
considered by many to be watershed moments,170 delivering inaugural sustainability disclosure
standards and ushering in an era of sustainability-related disclosure for capital markets.
It is important to remember, however, that the IFRS Sustainability Disclosure Standards are a
result of rigorous due process designed to ensure the Standards serve the public interest. The
steps of this process provide additional insight into how the first IFRS Sustainability Disclosure
Standards came to be, what perspectives were considered and how professionals can help shape
the Standards in the future.
The standard-setting process generally includes four steps:
1. Research and project screening: The ISSB is supported by a team of technical staff that
analyze on an ongoing basis the need for additional standards and amendments to existing
standards. Their analysis focuses on the nature and extent of perceived shortcomings and
potential ways to improve sustainability-related financial disclosure, considering various
factors such as investor demand, regulatory requirements, emerging issues and the
evolution of global disclosure practices. When the need for a potential standard-setting
project has been identified, the ISSB publishes a public discussion document—which
may take the form of a discussion paper, request for information (RFI) or research paper
designed to elicit comments from interested parties— and opens a public consultation. By
evaluating standards-development needs on an ongoing basis, rather than adhering to a
set schedule for evaluating and updated each Standard, the ISSB is able to conduct work
and make decisions in a responsive, relatively nimble manner.
2. Proposing a new standard or update to an existing standard: Based on feedback

169 TRWG, ‘Summary of the Technical Readiness Working Group’s Programme of Work,’ November 2021.
170 Bryan Strickland, ‘Historical Global Standards for Sustainability Reporting Released,’ Journal of Accountancy, 26 June 2023; Sam
Alberti, ‘Inaugural ISSB Standards ‘Watershed Moment’ for Sustainability Reporting,’ AccountancyAge, 26 June 2023.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

received and additional research, the ISSB decides, using a simple majority vote, if a
standard-setting project should be added to the agenda. If so, the ISSB proceeds to
deliberate the content of the proposed standard update or amendment in public meetings,
often supported by technical papers developed by staff to inform discussion of certain
critical topics in the proposal. Board members review and deliberate the content of the
proposal with feedback from previously published discussion documents. Once there is
agreement on the technical matters of the proposal, staff prepare and present an exposure
draft, which constitutes the official proposed update to the Standards. The proposal
then undergoes a balloting process wherein Board members indicate their approval or
disapproval of the issuance of the exposure draft via written ballot. If the exposure draft
has supermajority support, it is released for public consultation along with supporting
communications, inviting important stakeholders and the public to submit comments. In
many cases, the ISSB also undertakes additional outreach and engagement activities
such as meetings, discussion forums, roundtables or other sessions to gather opinions and
constructive feedback from the market.
3. Redeliberation and publication: After the publication of the exposure draft and the
public consultation period, the ISSB rigorously evaluates feedback and redeliberates the
proposal. At this stage, the Board considers whether the project should be discontinued
or re-exposed for additional feedback, or it identifies changes that should be made to the
Standard to prepare it for balloting and publication. In the event of the latter, staff present
the updated proposal to the Board for a final vote via written ballot. If the proposal gains
supermajority support, it is finalized and published along with an effects analysis and
supporting materials to support application of the new requirements.
4. Post-implementation review: After the ISSB issues a new Standard or amendment to
an existing Standard, the Board and technical staff monitor the use and efficacy of the
Standard(s) in the market. This typically involves assessing changes in the reporting
environment and regulatory requirements, as well as concerns about the quality of a
Standard that have been expressed by interested parties. If issues are identified that
may warrant an amendment to a standard, a request for information is issued for public
consultation to gather additional information and feedback.171 On the basis of feedback
received via public comment and other consultative activities, the Board presents its
findings and defines steps, if any, to be taken as a result of the review.172

171 IFRS Foundation, ‘Due Process Handbook,’ Section 5-6, August 2020.
172 Deloitte, ‘IASB Due Process,’ 2023.

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Figure 20—The ISSB standard-setting process

Throughout every Standards development cycle there are at least three explicit consultations
conducted to gather market feedback. The ISSB also observes how companies are implementing
the Standards and how investors are using the Standards, and welcomes unsolicited feedback,
allowing the ISSB to identify key priorities based directly on what is seen and heard from the
market. Every stage of the standard-setting process is conducted publicly and carefully considers
feedback from the market in its many forms. The ISSB actively solicits input and carefully weighs
the perspectives of reporting companies, investors, creditors, lenders, regulators, industry bodies
and other practitioners and subject matter experts when deciding what standards to create or
how existing standards should be improved. Market perspectives are a crucial input when assess-
ing the extent to which proposed standards or revisions can facilitate communication between
companies and investors.

11.2.2.1. Due process principles

The due process applied to the IFRS Sustainability Disclosure Standards is built on three
primary principles:
Transparency: The standard-setting process is characterized by transparency of process
and information, which is achieved through meetings and publications. ISSB meetings and delib-
erations where technical matters are discussed and decided upon are open to the public, meaning
anyone can attend as an observer. The meeting schedule is published in advance and, afterward,
recordings are made available on the IFRS Foundation website. Summaries of Board decisions
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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

reached in each meeting are also published and available online. Notably, the papers developed
by ISSB technical staff, which provide recommendations and supporting analysis for consideration
by the Board, are also publicly available and published in advance of Board meetings.
Full and fair consultation: The ISSB operates on the principle that wide consultation with its
stakeholders enhances the quality of the Standards. Consultations are carried out in various ways,
including invitations to comment (sometimes referred to as open consultations or public comment
periods); meetings, roundtables, and other consultation events; and work conducted by advisory
groups (discussed in more detail in the following section). Ultimately, full and fair consultation is
necessary to gather different perspectives and to ensure the Standards are effective in the real
world.
Accountability: The ISSB operates on the principle that it is responsible for evaluating the
benefits and costs of implementing proposed new requirements. By conducting an effects anal-
ysis during the redeliberation and publication stage of standard-setting, the ISSB assesses what
costs might be incurred by preparers, how sustainability-related financial disclosures are likely to
change, and other considerations. The Board reports the results of its analysis and also publishes
a basis for conclusions document, which explains the rationale behind decisions it reached
when developing or amending a Standard.173

11.2.2.2. Informed by experts

In addition to feedback solicited from practitioners and experts in the public and the expertise
of the Board itself, the ISSB consults closely with groups of important stakeholders organized to
provide oversight, guidance and feedback at every stage of work. This includes both permanent
groups that provide ongoing oversight and targeted stakeholder consultation, as well as ad-hoc
advisory groups formed to meet specific needs.
For example, during the development of IFRS S1 and IFRS S2, including post-implementation
monitoring and review, the ISSB relied on, and continues to rely on, the following groups:

Table 4—Example IFRS Foundation Standards advisory groups

Strategic advisory groups provide council across both IFRS Foundation Boards. For example,
the IFRS Advisory Council provides strategic advice to the IFRS Foundation Trustees, the IASB
and the ISSB on an ongoing basis.

173 IFRS Foundation, Due Process Handbook, Section 3, August 2020.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

ISSB advisory groups provide formal support to the ISSB for specific purposes. For exam-
ple, the Sustainability Standards Advisory Forum is composed of representatives from financial
accounting institutions and standard setters around the globe. It exists to support the ISSB, formal-
ize national and regional input on major technical issues related to the ISSB’s standard-setting,
and facilitate effective technical discussions related to the ISSB’s work. The Jurisdictional Working
Group includes jurisdictional representatives and members of the ISSB that work together to
establish dialogue and enhance compatibility between the ISSB’s work and jurisdictional sustain-
ability disclosure initiatives on an ongoing basis. The ISSB Investor Advisory Group is composed
of leading asset owners and asset managers that provide strategic guidance for the development
of the IFRS Sustainability Disclosure Standard and help ensure that the investor is adequately
considered in the ISSB’s standard-setting process. For the purpose of this curriculum, one does
not need to know the details of each ISSB advisory group. However, it is important to understand
that formalized advisory groups play an important role in gathering market feedback that informs
the Standards.

11.3. MAINTAINING THE SASB STANDARDS

In addition to the IFRS Sustainability Disclosure Standards themselves, the ISSB is respon-
sible for maintaining and enhancing the SASB Standards. A brief dive into the history of SASB
Standards development provides useful insight into the functionality of the SASB Standards and
how they are fit for purpose as a fundamental source of guidance within the IFRS Sustainability
Disclosure Standards.

11.3.1. THE INITIAL DEVELOPMENT OF THE SASB STANDARDS

The Sustainability Accounting Standards Board was conceived as an idea within the Harvard
University Initiative for Responsible Investment at the Kennedy School of Government and was
soon after founded in 2011 by Jean Rogers. The SASB standard-setting process was modeled
after the processes employed by the FASB and IASB, making it highly aligned with the current
ISSB standard-setting process in that it was designed to develop standards that facilitate the
production of material information that is useful to investors. The first provisional SASB Standard
was published in 2013, with additional provisional standards released through 2016. The
Standards were codified and released from their provisional status in 2018 after nearly six years
of work.
To develop the first provisional SASB Standards, the SASB founder and team designed a
methodology to surface sustainability topics that are likely to impact the financial performance of
companies in different industries. This methodology began by analyzing two primary sources of
evidence: evidence of interest and evidence of financial impact.

11.3.1.1. Evidence of interest

SASB evaluated the extent to which sustainability topics appear across reliable source docu-
ments such as regulatory filings, legal news, litigation reports, shareholder resolutions, corporate
sustainability reports, industry and academic research, media reports, innovation-related news,
sell-side research, investor call transcripts, third-party case studies, government reports, and
others. Known as the Five Factor Test, this data-driven method evaluated:
1. Financial impacts and risk: the likelihood that an issue may have an impact on near-,

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

medium-, or long-term financial performance of companies in the industry.

2. Legal, regulatory, and policy drivers: existing, emerging, or evolving regulatory
considerations, including the likelihood that legislation or policy will be enacted by
government that will require companies in the industry to take action to address the issue.
3. Industry norms and competitiveness: the current and best practices by industry firms
in addressing or disclosing information on the topic.
4. Stakeholder concerns and social trends: the importance of the issue to a broad range
of stakeholders, including shareholders, communities, NGOs, and the general public, that
might indicate whether the issue reflects social and consumer trends that are likely to rise
to the level of investor interest when they result in economic implications.
5. Opportunities for innovation: the potential for competitive advantage from innovation of
new products and services, or from the ability to serve new markets in order to address a
particular sustainability issue.

11.3.1.2. Evidence of financial impact

To rise to the level of a SASB disclosure topic, each topic surfaced by the Five Factor Test
was additionally vetted for evidence of financial impact. Without evidence of financial impact, a
sustainability disclosure topic was not included in a SASB Standard.
Sustainability issues can impact financial performance in very specific ways that vary by
topic and industry. One issue might affect revenues while another is tied to costs. To evaluate the
spectrum of potential financial impacts related to a sustainability topic across industries, SASB
assessed three primary financial drivers: (1) revenues or costs, (2) assets and liabilities and (3)
cost of capital. If there is strong evidence of financial impact, SASB further segmented these three
financial drivers into more specific financial impacts that mirror the way mainstream analysts and
investors value corporations, thus allowing sustainability-related financial impacts to be plugged
into a range of financial analysis tools and models.
Table 5—Channels of financial impact

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

For example, the sustainability performance of competing products and services can impact
revenues through market share and pricing power. Sustainability issues can change availability
and pricing of raw materials and inputs, impacting expenses through the supply chain via cost of
goods sold. Tangible and intangible assets—such as plant, property and equipment (PP&E) or
brand value, respectively—can be impaired by the impacts of sustainability issues such as climate
change. Liabilities can arise from sustainability issues such as severe weather-related events or
regulatory action related to climate change. Sustainability issues can affect a firm’s cost of capital
by raising its risk profile or limiting its access to capital, or oppositely improve access to capital
when the company is perceived as having higher growth potential.

11.3.1.2. Identifying metrics

For each disclosure topic, SASB similarly applied rigorous analysis and consistent due
process, relying on a set of characteristics to ensure metrics produce information that is reason-
ably likely to influence investor decisions. Specifically, the metrics within the SASB Standards were
developed to be representationally faithful, complete, comparable, verifiable and understandable.
One will notice that these characteristics align with the ISSB’s criteria for useful sustainability-re-
lated financial information (see Section 9.5.1.).

11.4. T
 HE INITIAL DEVELOPMENT OF THE TCFD
FRAMEWORK
In response to growing recognition that climate change poses risks to the global economy
and that investors increasingly demand transparent information about climate-related risks and
opportunities, the Financial Stability Board (FSB) established the TCFD in 2015. The FSB is an
international body that monitors and makes recommendations to the global financial system with
the goal of promoting global financial stability. It is structured as a council of G20 authorities
responsible for financial stability in their respective jurisdictions. The FSB selected members repre-
senting preparers and users of financial disclosures to form the task force.174
The TCFD employed a collaborative and consultative approach to develop the
Recommendations, engaging experts from many countries with relevant areas of expertise.175
While the TCFD secretariat was not a standard-setting board, it relied on many of the same prin-
ciples, which are reflected in the bullets below. This process included:
Determining scope and high-level objectives: The TCFD began by determining the scope
and objectives of its work. It conducted public outreach, reviewed existing disclosure frameworks,
identified best practices, and considered the unique challenges posed by climate-related disclo-
sures. It considered ‘the physical, liability and transition risks associated with climate change and
what constitutes effective corporate financial disclosures in this area. It also sought to develop a
set of recommendations for consistent, comparable, reliable, clear and efficient climate-related
disclosures.’176
Developing recommendations: To address the multifaceted nature of climate-related

174 FSB Press Release, ‘FSB to Establish Task Force on Climate-related Financial Disclosures,’ Ref no: 91/2015, 4 December 2015.
175 FSB Press Release, ‘FSB Announces Membership of Task Force on Climate-related Financial Disclosures,’ Ref no: 1/2016, 21
January 2016.
176 FSB Press Release, Ref no: 1/2016, 21 January 2016

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART II: THE SUSTAINABILITY INFORMATION ECOSYSTEM

financial disclosures, the TCFD drafted its recommendations, focusing on four thematic areas
that generally reflect how organizations operate: governance, strategy, risk management, and
metrics and targets. The recommendations also offered several key features. They were designed
to be adoptable by companies of all types; be included in mainstream financial filings; provide
decision-useful, forward-looking information; describe the potential impacts of climate scenarios;
and increase focus on risks and opportunities related to the transition to a low-carbon economy.
Soliciting public consultation and feedback: In December 2016, the TCFD released a
draft of its recommendations for public consultation, seeking input from a broad range of stake-
holders. The feedback received during this phase was processed and incorporated to refine and
strengthen the Framework through a series of iterative revisions.
Making final recommendations and FSB endorsement: In June 2017, the TCFD published
its recommendations report. The report provided guidance on governance, strategy, risk manage-
ment, and metrics and targets, emphasizing the importance of scenario analysis in assessing
climate-related risks and opportunities. The FSB, recognizing the significance of the TCFD’s work,
endorsed the recommendations and urged companies and financial institutions to adopt and
implement them.
As the only required source of guidance and the source of the IFRS Sustainability Disclosure
Standard’s core content respectively, the SASB Standards and the TCFD Recommendations
played a central role in the development of the IFRS Sustainability Disclosure Standards. The
ISSB built upon these resources not only because of their investor focus, but also because they
were developed in response to market needs using transparent due process and public input.
Importantly, the CDSB Standards and Integrated Reporting Framework and Integrated Thinking
Principles were, while not subject to the same rigorous due process, also developed in response
to market needs and utilized public input.

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
9 RECOGNIZE the ISSB’s standard-setting process, including the processes
originally used to develop the SASB Standards and TCFD Recommendations.

? CHECK YOUR UNDERSTANDING

1. What are the steps of the ISSB standard-setting process?

2. What three principles are applied to ISSB due process?

3. W
 hen developing the SASB Standards, what two types of evidence were assessed to
identify industry-level disclosure topics?

JUMP TO ANSWERS

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

HOW COMPANIES
DISCLOSE
SUSTAINABILITY-
RELATED FINANCIAL
12
INFORMATION
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:

11 DIFFERENTIATE how companies disclose sustainability-related financial

information.

12.1. INTRODUCTION TO SAMPLE DISCLOSURES

Companies often disclose investor-focused sustainability information in different ways. Though
not a completely representative sample, the following excerpts from real reports illustrate some
of the key features of investor-focused sustainability disclosures. As Standards first published
in June of 2023, application of the IFRS Sustainability Disclosure Standards is rather young and
examples of disclosures using the IFRS Sustainability Disclosure Standards are not yet widely
available. However, many companies apply the investor-focused disclosure standards and frame-
works upon which the IFRS Sustainability Disclosure Standards were built. By evaluating and
comparing examples of these disclosures, one can identify features of reports that reflect current
disclosure practices and, though not compliant with the IFRS Sustainability Disclosure Standards,
lend insight into the ways users can expect to encounter sustainability-related financial information
as practices continue to mature. These features can be characterized in four ways:

• Why companies disclose varies according to the company’s needs and the information
needs of the audiences the company is trying to reach, which can include investors and/
or other stakeholders.

• Where companies disclose varies considerably across reporting channels and formats.

• What information companies disclose differs across industries, operating environments and
internal data collection processes.

• 0 ow companies disclose differs according to the reporting platform, data presentation,

H
and reliability of the information reported.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

12.2. WHY DO COMPANIES DISCLOSE INVESTOR-

FOCUSED SUSTAINABILITY INFORMATION?

TO MEET INVESTORS’ INFORMATION NEEDS

ALONGSIDE THE NEEDS OF OTHER STAKEHOLDERS

State Street Corporation | 2019 Corporate Responsibility Report

A US-based company operating in the Asset Management & Custody Activities industry.
State Street Corporation uses a combination of standards and frameworks to communicate to key
audiences. It reported using the SASB Standards and TCFD Recommendations (investor-focused),
in addition to the GRI Standards (stakeholder-focused). Specifically, the company emphasizes
the use of SASB Standards and the TCFD Recommendations to allow investors to make informed
decisions using sustainability metrics that will likely impact long-term performance and business
model development. It uses GRI Standards to serve its employees and the broader community.

Some companies identify their unique disclosure objectives, then corresponding framework(s)
and standard(s) to support specific communication objectives.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHY DO COMPANIES DISCLOSE INVESTOR-FOCUSED

SUSTAINABILITY INFORMATION? CONT’D

TO COMMUNICATE THE LINK BETWEEN

SUSTAINABILITY MANAGEMENT AND FINANCIAL
PERFORMANCE

AGL Energy Ltd., Annual Report 2020

An Australia-based company operating in the Electric Utilities & Power Generators and the
Gas Utilities & Distributors industries.
AGL describes how the energy transition will impact company value drivers and provides insight
into how the company aims to manage the transition by balancing decarbonization efforts with
the need to supply affordable energy, and responsibly managing high-emitting assets until their
closure. Such tradeoffs also balance near-term financial performance with long-term value.

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FSA CREDENTIAL LEVEL I STUDY GUIDE
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in
borders
Incremen
al resource of
and energy
use of for FFC
enhanced core KPI Monitored
managing
projects the potential effects of changing
ns efficiency ratio Margin function
these projects investmen
n of the business sustainability
efficiency products access to natural gas on the firm’s long-term
red in viability in line with the Technical
Ensure Protocol
expansion offor
business across
on and Educate farmers regarding balanced the Chemicals industry Standard. capitalizing on FFC’s well
the border
Keeping our resource utilization The company is evaluating Promotion and enhancement of
nvestment
processes,
Strategy
at an optimum level through strict
and slow release fertilizer usage
various options related to FFC Sona Brand to signify business
recognized technical expertise and
money losses
governance policies
through farm advisory and facilitation
alternate energy resources
Where companies explain
excellence
how the experience earned over
business
centers the last four decades to augment
management of sustainability disclosure
Company’s profitability
During Ongoing process – The topics supports financial management and
Short / Medium termNature Medium
Medium // Long
Long term
term Medium / Long term Short / Medium term
y invested management has implementedoutcomes, companies can create a clear for the year
Ongoing
High process
Priority – Plans for
High
High High which Ongoing
Management process – Targets
is evaluating
High
Energy Status
effective cost controls narrative linking sustainability information Ongoing
2019 achieved achieved
various viableFinancial
options.
e has been Human capital, intellectual
Resources Financial
Financial capital, enable
capital, human savings
human capital,
capital, in production
to financial and performance. Such
Financial capital, manufactured capital, a capital, manufactured capital,
narrative
human capital, social and relationship
ment. capital, financial allocated
capital manufactured other operating / financing
capital
intellectual capital, human costs
capital
provides insight into a company’s capital position
and prospects,Pakistan’s
based onper its management
acre yield needs of to be
Futuresustainability-related risks and opportunities
evant in The KPI will remain relevant in The KPI will remain relevant in improved.
The KPI will The management
remain relevant in analyses The KPI w
relevance
over time.of
the future the future the
the impact
future of FFC initiatives on an future
KPI
oduction Gross Profit Margin & Net Profit Funds allocation
ROI, Payback of to farm advisory
investment in annual
Incremental income from equity basis Incremental revenue and enhanced
KPI Monitored
Margin function
these projects investments profitability
Continuous depletion of
We remain focused on optimizing
Pakistan’s gas reserves will
resource allocation through Improvement in per acre agricultural
position There is always room for impact the Company’s fertilizer FFC Bran
application of effective policies. output of Pakistan is necessary
ith improving efficiency and production. To be sustainable business
Ongoing process – The However, uncontrollable factors for long-term food security of the
nable it to synergies
management hasamong the functions.
implemented Opportunities / in the long-term, the Company confidenc
Plans for Ongoing
Management is particularly
process increase
– Targets for the
evaluating year in input Country. However, poorprocess.
An evolving education and for
Major targets
t portfolio Withcost
effective focused management
Status
controls which
achieved
various viable options. Threats
Ongoing process focuses on evaluating alternative investors
enable savings in production and costs by Government and any knowledge of the year achieved.
farmers makes them
ing strategies, operational efficiency energy options. future inve
other operating / financing costs potential decline in international unwilling to adopt modern farming
can be enhanced. These ventures require high growth.
Future
Pakistan’s per acre prices may to
yield needs impact
be the Company techniques in achieving this objective
elevant in The KPI will remain relevant in improved.
The KPI willThe management
remain analyses
relevant in capital
The KPI will remain relevant in thecosts but arewillnecessary
The KPI remain relevant in the
relevance of adversely
the future
KPI
the
the impact
future of FFC initiatives on an future for sustaining production
future levels
annual basis
The Company’s technical expertise are
Continuous depletion of

16
We remain focused on optimizing widely recognized across the globe
m for
resource allocation through
application of effective policies.
Pakistan’s gas reserves will
Improvement in per acre agricultural
impact the Company’s fertilizer
output of Pakistan is necessary
Company Overview
FFC Brand image denotes a reputable
Annual
creating Report
ample opportunities 17
2019 for the
Company to extend its services beyond
and production. To be sustainable business enterprise which provides
However, uncontrollable factors for long-term food security of the the national boundaries. However,
e functions. Opportunities / in the long-term, the Company confidence to local/international
particularly increase in input Country. However, poor education and with the ongoing technological
gement Threats focuses on evaluating alternative investors to join hands with FFC for
costs by Government and any knowledge of farmers makes them advancement in this industry, the
nal efficiency energy options. future investments and collaborated
potential decline in international unwilling to adopt modern farming Company remains cognizant and plans
These ventures require high growth.
prices may impact the Company techniques in achieving this objective to deal with this challenge through
capital costs but are necessary
adversely investment on its human resource to
for sustaining production levels
keep abreast with such advancements.

16
COPYRIGHT
Company©Overview
2023 IFRS FOUNDATION. ALLReport
Annual RIGHTS
17
2019RESERVED 130
FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

Key Takeaways
There are many reasons why companies choose to disclose investor-focused sustainability
information. When companies disclose using more than one standard or framework, the clear
application of investor-focused standards support investors in identifying the information that
is reasonably likely to influence their decisions. The IFRS Sustainability Disclosure Standard’s
approach to materiality and focus on sustainability information connected to financial statements
can support companies in communicating how sustainability-related risks and opportunities affect
a company’s ability to generate returns.

12.3. WHERE DO COMPANIES DISCLOSE INVESTOR-

FOCUSED SUSTAINABILITY INFORMATION?

IN ANNUAL FINANCIAL REPORTS, INCLUDING

REGULATORY FILINGS OR INTEGRATED REPORTS

Etsy, Inc., Form 10-K

A US-based company operating in the E-commerce industry.

Etsy’s 10-K provides an example of sustainability information fully embedded into annual regula-
tory filings.
Mainstream financial
reports, including annual
reports and regulatory
filings, are usually the
go-to resource for
investors. They provide
a convenient location to
disclose sustainability
information. They
typically involve stringent
requirements for
completeness, accuracy
and timing, which
supports the validity of
disclosed information.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHERE DO COMPANIES DISCLOSE INVESTOR-FOCUSED

SUSTAINABILITY INFORMATION? CONT’D
...IN ANNUAL FINANCIAL REPORTS, INCLUDING REGULATORY FILINGS OR INTEGRATED REPORTS

Vornado Realty Trust, Form 8-K

A US-based company operating in the Real Estate industry.

Vornado included its investor-focused sustainability disclosures as an appendix to an individual
regulatory filing.
Even within the more-prescriptive world of regulatory filings, companies may have some
discretion as to where sustainability information is reported. Companies and investors often
view sustainability disclosure in regulatory filings as a signal of seriousness and credibility.

Item 7.01. Regulation FD Disclosure.

On April 6, 2020, Vornado Realty Trust (the “Company”), the general partner of Vornado Realty L.P., issued a press release announcing that the Company released its 2019
Environmental, Social and Governance (“ESG”) report. The ESG report is posted on the Company’s website under the “Sustainability” page. The press release and the ESG report are
attached as Exhibit 99.1 and 99.2, respectively, to this Current Report on Form 8-K and is incorporated herein solely for purposes of this Item 7.01 disclosure.

Exhibit 99.1 and 99.2 hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject
to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Vornado Realty Trust or Vornado Realty L.P. under the Securities Act of 1933,
as amended, or the Exchange Act.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

The following exhibits are being furnished as part of this Current Report on Form 8-K:

99.1 Vornado Realty Trust Press Release dated April 6, 2020

99.2 2019 ESG report

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHERE DO COMPANIES DISCLOSE INVESTOR-FOCUSED

SUSTAINABILITY INFORMATION? CONT’D

IN ANNUAL SUSTAINABILITY REPORTS, INCLUDING

REPORTS USING MULTIPLE FRAMEWORKS OR
STANDARDS

Tokyo Electric Power Company (TEPCO), Integrated Report

A Japan-based company operating in the Electric Utilities & Power Generators industry.
Tepco’s report provides an example of an annual integrated report prepared according to the
Integrated Reporting Framework. In addition to SASB Standards, this integrated report uses GRI
Standards and references the TCFD Recommendations.
In the absence of regulatory requirements, companies must decide where to disclose material
sustainability information. Including information in an integrated report provides a single
location for both financial and sustainability information. Disclosure in an integrated report can
enable companies to link sustainability information explicitly to long-term value creation.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 133

 brought the total In 2019, we planted more than 15,000 tr
supply system at a STANDARDS
conservation zone on

Through a partner
FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE
marked improvement in conditions for l
that had disappeared and been presum

WHERE DO COMPANIES DISCLOSEof Environment, w

brown antelope long gone from the reg
INVESTOR-FOCUSED
As part of our reforestation program, we
SUSTAINABILITY INFORMATION? CONT’D
stakeholders, which involves training 14

last evaluation con

tangelo farm. A naturally occurring hybr
...IN ANNUAL SUSTAINABILITY REPORTS, INCLUDING REPORTS USING MULTIPLE FRAMEWORKS OR STANDARDS
a valuable cash crop for the region.

planted had surviv

Planning for the Long Term
Roxgold, 2019 Sustainability Report At Roxgold, we plan for the long term. B
how we propose to rehabilitate the site
throughout the mine’s life. In 2019, we in
Bringing Back the Forests added social transition activities to the c
closure on local communities.
As part of Roxgold’s biodiversity program, we’ve expanded our
reforestation efforts. In 2019, we helped plant more than 15,000 trees
in the area surrounding the Yaramoko mine, surpassing our initial goal
of 10,000. We also fenced and reforested one hectare of land adjacent
to Bagassi Secondary School, and distributed 300 fences in an effort
to protect trees in particularly vulnerable areas. Our 2019 activities
brought the total number of trees planted to more 100,000 since 2014.
236,093
water recycled
Through a partnership between Roxgold and the Provincial Service
of Environment, we monitor the success rate of the program, and the
last evaluation conducted in December 2019 found that 91% of trees
planted had survived.

Introduction About Roxgold CEO Message Our Approach Our People Social Responsibility
Roxgold 2019 Sustain
Environmental Stewardship Sustainability Performance

Roxgold 2019 Sustainability Report

Priority Topics and Associated Metrics Unit 2019 2018 2017 SASB Metric
Waste disposal: stored m3 619 439.5 519.4

Total weight of tailings waste dmt 466,157 307,591 266,599 EM-MM-150a.1

Percentage of tailings recycled % 0 0 0 EM-MM-150a.1

Total weight of mineral processing waste t 617,133 395,901 288,736 EM-MM-150a.2

Percentage recycled of mineral processing waste % 74 57 51 EM-MM-150a.2

Electricity consumption, total energy consumed MWh 41,690 30,502 26,769 EM-MM-130a.1

Electricity consumption, percentage grid electricity % 92 82 88 EM-MM-130a.1

Diesel consumption ML 4.4 4 2.95

Percentage of mine sites where acid rock drainage is:

A Canada-based company operating in the Metals & Mining industry.
Predicted to occur % 0 0 0 EM-MM-160a.2

Roxgold’s
Actively mitigated report is an example of how a company % can communicate
0 0 corporate
0 sustainability
EM-MM-160a.2

efforts byorhighlighting
Under treatment remediation contributions to the UN% SDGs alongside0 investor-focused
0 0 sustainability
EM-MM-160a.2

data in annual sustainability reports. The combination

Percentage of (1) proved and (2) probable reserves in or near sites with protected
conservation status or endangered species habitat %
of contributions
0 0
to the UN SDGs
0
and SASB
EM-MM-160a.3

Standards can provide specific, decision-useful sustainability data regarding the company’s
performance while also communicating the company’s impacts on broader society.
Investor-focused sustainability data is sometimes included in reports using a separate data
table or index in the back of the report.

Concept and Design: THE WORKS DESIGN COMMUNICATIONS worksdesign.com

Roxgold 2019 Sustainability Report 22

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

GENERAL DISCLOSURES ECONOMIC ENVIRONMENTAL SOCIAL INDEX Jabil Sustainability

WHERE DO COMPANIES DISCLOSE INVESTOR-FOCUSED
SUSTAINABILITY INFORMATION? CONT’D
GRI 403-8 Jabil’s EHS Management System is mandatory for:
...IN ANNUAL SUSTAINABILITY REPORTS, INCLUDING REPORTS USING MULTIPLE FRAMEWORKS OR STANDARDS
Workers covered by an occupational
• All manufacturing locations owned or leased by Jabil, and all joint ventures where Jabil
health and safety management
has operational control.
system
• All research and development (R&D) locations that have more than 50 percent non-
administrative activities and more than 60 employees.
• Jabil locations with less than 50 percent non-administrative activities are not required

Jabil, Sustainability Report

to implement full EHS management system requirements, unless certain high-risk
EHS 2019
concerns exist, such as explosive materials, high-flammable materials, toxic
materials, etc.

GRI 403-9 Injuries 2017 2018 2019

Work-related injuries
For employees:
SASB 320a.1 Total Recordable Injury Rate (TRIR) 0.18 0.25 0.29
(1) Total recordable incident rate
(TRIR) and (2) near miss frequency Fatalities (#) 0 0 0
rate (NMFR) for (a) direct employees
Health and safety-focused audits (#) 99 123 156
and (b) contract employees
OSHA 18001 certifications (# of sites) 14 14 14

High-consequence work-related injuries (#) 3 3 2

Main types of work-related injury Machines Slip/Fall Slip/Fall

Number of hours worked 367,380,506 433,567,648 446,703,298

Note: The number of hours work includes all active Jabil sites, as well as those which Jabil does not track contractor injuries separately, as OSHA requires them
were closed during that fiscal year. Jabil employees for injury reporting and tracking purposes.

We do not currently track near-miss frequency rate (NMFR).

A US-based company operating in the Electronic Manufacturing & Original Design
Manufacturing industry.
This excerpt shows how companies have applied metrics from the GRI Standards and SASB
Standards to a common data set. Where GRI Standards ask for information regarding Work-
Related Injuries, SASB Standards prompt the disclosure of broader information related to Labor
Conditions. Both request specific metrics to measure each.
Rather than a separate table at the end of a report, some companies choose to weave
investor-focused and non-investor focused information throughout reporting documents,
presenting key metrics on specific topics as they appear in the report. Notably, if a company
is seeking compliance with the IFRS Sustainability Disclosure Standards within its general
purpose financial reports, the use of metrics from the GRI Standards are only permitted where
those metrics meet the information needs of investors (among other criteria).

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 135

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHERE DO COMPANIES DISCLOSE INVESTOR-FOCUSED

SUSTAINABILITY INFORMATION? CONT’D

AS A STAND-ALONE REPORT

European Investment Bank (EIB), 2019 Sustainability Disclosures in Accordance with

SASB Standards

A Luxembourg-based company operating in the Investment Banking & Brokerage industry.

The EU Bank, owned by and representative of the European member states, serves as an example
a stand-alone report entirely made up of investor-focused sustainability metrics.
Data produced using the SASB Standards has been disclosed in a separate document in
which the only information included is related to the Standards.

EIB 2019
Sustainability
Disclosures in
accordance with
SASB Framework
(Sustainability Accounting Standards Board)
SASB Accounting Metrics

Employee diversity and inclusion

Metric: FN-IB-330a.1
I EIB gender representation by employee category (%)
2019 2018 2017
Female Male Female Male Female Male
Managers 29.7 70.3 29.1 70.9 27.4 72.6

Executive Staff 43.2 56.8 42.2 57.8 40.8 59.2

Support Staff 87.6 12.4 85.8 14.2 85.7 14.3

Local Agents 51.9 48.1 55.0 45.0 50.0 50.0

Incorporation of ESG factors in investment banking and brokerage

activities
Metric: FN-IB-410a.2
E ESG integration

100% of EIB investments incorporate environmental, social and governance (ESG)

factors. Total investment in 2019 amounted to EUR 63.3 billion. For a breakdown by
sector, please see FN-IB-000.B.
Metric: FN-IB-410a.3
COPYRIGHT
E ©Sustainability due diligenceALL RIGHTS RESERVED
2023 IFRS FOUNDATION. 136
The EIB appraises and monitors all the investment projects it finances in terms of their
sustainability credentials such as environmental, social and governance aspects. Certain
FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHERE DO COMPANIES DISCLOSE INVESTOR-FOCUSED

SUSTAINABILITY INFORMATION? CONT’D

AS A WEB-BASED REPORT

General Motors (GM), 2019 Sustainability Report

A US-based company operating in the Automobiles industry.

Specific sections of GM’s report can be accessed through a unique URL. Other URL paths can
be used to access other report sections, such as that aligned with the CDP Questionnaire or GRI
Standards.
Web-based disclosure can provide opportunities for more timely, direct, extensive and
navigable data.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 137

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

Key Takeaways
Where companies disclose investor-focused sustainability information may include a variety of
channels, such as regulatory filings, annual financial reports, sustainability reports, integrated
reports, stand-alone reports and web-based platforms. Indeed, the IFRS Sustainability Disclosure
Standards do not require disclosures to be filed in a specific location, as general purpose financial
reports can be published in various locations. In a growing number of jurisdictions, public report-
ing of certain sustainability information may be compulsory, in which case regulators designate
a specific disclosure location. In the absence of reporting requirements, a company can choose
the channel that best suits its needs. Where a company discloses such information often reflects
where it expects investors and other stakeholders will look for that information. For annual and
sustainability reports, some companies choose to disclose information using investor-focused
standards alongside other stakeholder-focused standards, allowing companies to offer compa-
rable, decision-useful data while also communicating awareness of social and environmental
impacts.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 138

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

12.4. WHAT INVESTOR-FOCUSED SUSTAINABILITY

INFORMATION ARE COMPANIES REPORTING?

CHOOSING THE RIGHT INDUSTRIES, DISCLOSURE

TOPICS AND METRICS

Grupo Arcor (Arcor Group), 2019 Sustainability Report

An Argentina-based company operating in the Processed Foods, Agricultural Products and

Containers & Packaging industries.

WHICH ARE OUR

BUSINESSES?

CONSUMER FOOD PRODUCTS as well as suppliers of raw materials to pastry shops, bakeries, Triunfo, Selz, Opera, Chocolinas, Cereal Mix, Tentaciones,
chocolate shops, ice cream shops, alfajores, puddings, Danix, Criollitas and Sonrisas.
We specialize in manufacturing consumer sweet bread, and cookies factories. We manufacture a
food products. Through the different wide variety of chocolates such as bonbons and bite-size Ice creams
chocolates, tablets, sugar-coated, baking chocolate and Arcor’s presence in the impulse ice-cream market represented
businesses, our goal is to provide an pastry products, chocolates for children, chocolate-coated since 2005 a strategic bet, which consolidated consumers’
exclusive offer with continuous innovation wafers, chocolate bars and seasonal products for relevant preference for chocolate and confectionery brands. Arcor
and an extensive brand portfolio. dates such as Easter, Halloween and Christmas. Our brand produces popsicles, cups, cones, chocolate-coated ice-
portfolio includes major brands, among which stand out: creams, frozen bonbons and frozen desserts. Among the
AGRIBUSINESS
Águila, bon o bon, Cabsha, Chokko Snack, Cofler, Hamlet, main brands that are marketed are Tofi, bon o bon, Cofler,
Confectionery Nikolo, Rocklets, Sapito, Tofi and Tortuguita. Slice, Aguila and Rocklets.
The Agribusiness Division seeks
Confectionery is the business that gave rise to the company.
to add
Arcor is the world’s first manufacturer of hard candies and value to the agro-
Food 1,4 MILLION TONS
Functional Products 1,800 TONS 85,000 LITERS 50,000 LITERS
the largest company in the region regarding productionindustrialArcorprocesses in order
participates to that include marmalades, It seeks
in categories to develop
OF MILLED
CANE
SUGARproduct profiles
PERconsumers.
YEAR
OFthat adaptCORN
GROUND to the different
OF ALCOHOL PRODUCED OF MILK PRODUCED P
capacity, production volume, sales and brand development. solid sweets, sauces, tomatoes, canned vegetables, fruits needs of our Currently, PER DAY nutraceuticals PER DAY
it offers ER DAY
We produce filled, hard, sour, crystal, soft, milk andoffer
gummy newandand fish,better
desserts,solutions
beverages,to juice powders, premixes, (nutrition + pharmaceuticals) to promote options that allow
candies. We also produce lollipops in differentdifferent industries
shapes, polenta, driven,
dressings, thede leche (caramel spread), oils, consumers to easily incorporate nutrients that the body needs
dulce
chewing gum (sugar-free or not), bubble gum,same nougatas seasoning
Arcor, bymixes a commitment
with oven bags, among others. Our offer to be well, physically and mentally. Arcor is responsible for
candies (turrones), tablets, jellies and marshmallows. Its of high-quality products is marketed with the endorsement Simple, the functional products brand.
to qualityofinArcor
main brands include: Topline, Bigtime, ¡Poosh!, Menthoplus, all ofandtheir products.
La Campagnola.
Mr. Pop’s, Mogul, Butter Toffees, Alka and Big Big.
Arcor Group produces
Cookies,fructose,
Crackers, maltose,
Snacks and Cereals
Chocolate glucose, corn
Arcor starch, corn aflour,
produces wide semolina
variety of products, such as cereals,
Since 1970 we have been part of this segment, and withcorn
the oil,snacks,
generating a significant
crackers, number
cereal cookies, assorted cookies, filled cookies,
chocolate production as a finished product of by-products used for animal feeding.
sweet dry cookies, Christmas products, wafers, alfajores and
We are thecereal
first corn
bars. flour
Withinproducer, one the following brands are
this business PACKAGING
of the leaders in theBagley,
featured: production
Maná, of ethyl Rumba, Formis, Aymoré,
Saladix,
alcohol from cereals, and one of the main
The Packaging division of Arcor
milk producers in Argentina.
Group has a leading position in 260,000 TONS 900 MILLION M2 12,000 TONS 23,000 HECTARES
the region, being the most OF PAPER
PER YEAR
OF CORRUGATED CARDBOARD
PER YEAR
OF FLEXIBLE MATERIAL
PER YEAR
OF OUR OWN FOR FORESTRY
DEVELOPMENT
important packaging solutions
company in the Southern Cone.

Through our brands: Cartocor, Converflex,

Papel Misionero, Puntapel and Zucamor,
Arcor offers its customers innovative and
sustainable packaging solutions, at the
forefront of world market trends. We offer
flexible packaging, POP material, paper bags,
16 | 17 SUSTAINABILITY REPORT ����
corrugated cardboard, recycled paper, virgin
paper, cardstock packaging.

We stand out for our special emphasis

on customer service, ongoing innovation,
productivity, quality, and environment
conservation.

Reporting Across
Languages
18 | 19 SUSTAINABILITY REPORT ����

While the referenced Grupo

Arcor report is in English, like
many companies with global
investors and non-investor
stakeholders, it publishes re-
ports in multiple languages.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 139

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHAT INVESTOR-FOCUSED SUSTAINABILITY INFORMATION

ARE COMPANIES REPORTING? CONT’D
…CHOOSING THE RIGHT INDUSTRIES, DISCLOSURE TOPICS AND METRICS

Grupo Arcor identifies its business as Consumer Food Products, Agribusiness and Packaging. It
reports using three SICS industries: Processed Goods, Agricultural Products and Containers &
Packaging.
While the IFRS Sustainability Disclosure Standards, including the SASB Standards, help
companies identify the disclosure topics (i.e., sustainability-related risks and opportunities)
that are reasonably likely to affect the company’s prospects, preparers have the discretion to
determine if certain topics are not applicable. Depending on the company’s business model
and activities, these topics may span multiple industries.

ASSESSING INDUSTRY-SPECIFIC TOPICS AND

METRICS

AGL Energy Ltd., Annual Report 2020

Previously mentioned: An Australia-based company operating in the Electric Utilities &

Power Generators and the Gas Utilities & Distributors industries.
The SASB Standard for Electric Utilities companies calls for data related to Nuclear Safety &
Emergency Management, as it is common for companies in this industry to own and operate
nuclear power facilities. However, AGL does not own nuclear power facilities, and therefore did
not disclose the associated metrics. As stated in IFRS S1, preparers are obligated to consider
the applicability of the metrics associated with disclosure topics in the SASB Standards, but may
conclude they are not applicable.
AGL also offers activity metrics alongside other data.
Activity metrics are included to measure the scale of the business, provide operational
context, and facilitate normalization of sustainability metrics, which are important for investor
analysis.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 140

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHAT INVESTOR-FOCUSED SUSTAINABILITY INFORMATION

ARE COMPANIES REPORTING? CONT’D
…ASSESSING INDUSTRY-SPECIFIC TOPICS AND METRICS

Alcon, 2019 Corporate Responsibility Report

Our Story About This Report Benefiting Customers Caring for Our Winning in the Working With Integrity ESG Content Indices 38
& Patients Environment Workplace Performance Data

Critical Materials • Leveraging supplier diversity results to meet internal and external goals
• Measuring success based on quarterly and annual metrics for supplier diversity
HC-MS-430a.3
We seek to partner with suppliers in the following categories:
Most critical materials and production processes used in the manufacture of Alcon’s
• Women-Owned Business Enterprises (WBE)
products are, where possible, dual sourced. Alcon maintains an ongoing risk mitigation
project team to manage the risks in our supply chain of critical materials. We conduct • Minority-Owned Business Enterprises (MBE)
business with a wide range of suppliers, and our manufacturing operations are not • Veteran-Owned Business Enterprises (VBE)
overly dependent on a single supplier, except where intellectual property and/or other • Small Business Enterprises (SBE)
exclusivity agreements exists. Our annual spend with the largest direct material supplier • Lesbian/Gay/Bisexual/Transgender-Owned Enterprises (LGBTE)
to Alcon accounts for less than 4% of our total annual direct material expenditure.
As a member of the Dallas Fort Worth (DFW) Minority Supplier Development
We seek to understand the origin of the materials that go into our products, and we Council and the Women’s Business Council Southwest, Alcon participates in
Our Story
have adopted a formal Conflict About This policy,
Minerals Report which
Benefiting Customers to and
we communicate Caring for Our
enforce various
Winning in the outreach
Workingactivities to support our
With Integrity ESGsupplier
diversity goals and objectives.
Content Indices 48
& Patients Environment Workplace Performance Data
with our suppliers. This policy describes our commitment to compliance with conflict These outreach activities provide an opportunity to promote innovation
minerals requirements, supplier due diligence, and ongoing supply chain evaluation. through the introduction of new products, services, and solutions, as well as to
collaborate on industry best practices.
Annually, we establish and document our process to evaluate our products, in order
to identify and assess the presence and sources of conflict minerals in the supply
SASB Topic & Code Accounting Metric Report Section Omissions
chain. Our Conflict Minerals Core Team uses standardized documentation to capture
Ethical
data, keyMarketing
decisions, and processes andDescription
procedures of related
code oftoethics
the usegoverning
and sources of
Our Results
Business Ethics - Preventing Off-
HC-MS-270a.2
conflict minerals in our products. Wepromotion
retain suchofdocumentation
off-label use of products. with our
in accordance Label Use
corporateDesign
Product document retention policy.
& Lifecycle On May 29,
Discussion of2020, we published
process to assess ourandfirst Conflict
manage Sustainable
We track Products & on diverse suppliers to measure our impact on diverse
our spending
Management
Minerals Report as a standalone company.
environmental and human health considerations and small
Services business With
- Compliance enterprises. In 2019, Alcon spent 12% of our US supplier
HC-MS-410a.1 associated with chemicals in products and meet spend Regulations
Chemical on qualified diverse suppliers.
As we move forward, we are improving our due diligence process by increasing
demand for sustainable products.
supplier responses to our Reasonable Country of Origin Inquiry (RCOI) in terms of 2019 DIVERSE SUPPLIER SPEND
Product
accuracy,Design & Lifecycle
timeliness, Total amount of products accepted for takeback
and completeness. Sustainable Products & Alcon replaced this metric based on the lack
Management and reused, recycled, or donated, broken down Services - Reprocessing
Diverse Used or
Supplier Category of available data. 2019
HC-MS-410a.2 by: (1) devices and equipment and (2) supplies. Obsolete Equipment
All Diverse and Small Suppliers $226M
Supplier DiversityPercentage
Program
Supply Chain Management of (1) entity's facilities and (2) Tier ESGMinority-Owned
Performance Data
Business Enterprise $33M
HC-MS-430a.1 I suppliers’ facilities participating in third-party
Women-Owned Business Enterprise $50M
Alcon continually seeks to identifyaudit programs for
and collaborate manufacturing
with best-in-classand product
diverse
quality. to building a strong Supplier Diversity
suppliers. To this end, we are committed Veteran-Owned Business Enterprise $7M
Program in the US by:
Supply Chain Management Description of efforts to maintain traceability Small Business
Responsible Enterprise
Procurement $199M
HC-MS-430a.2 within LGBT-Owned Enterprise $0.31M
• Expanding the inclusion of large andthe distribution
small chain. in the
diverse suppliers & Supply Chain - Track &
procurement process Trace Program
For more information, please see ESG Performance Data.
• Seeking
Supply diverse
Chain and/or small suppliers
Management through
Description of the outreach
managementefforts
of risks Responsible Procurement & Disclosure does not identify the critical
HC-MS-430a.3 associated
• Communicating the value of supplier with the
diversity use of critical materials.
to stakeholders Supply Chain - Critical Materials materials that present a significant risk
to Alcon's operations, the type of risk(s)
they represent.
Business Ethics Total amount of monetary losses as a result of ESG Performance Data
A Switzerland-based
HC-MS-510a.1 legalcompany operating
proceedings associated with bribery orin the Medical Supplies industry.
corruption.

Alcon provides
Business Ethics an explanation for
Description of code of itsgoverning
ethics decision toBusiness
refrain Ethicsfrom
- Code ofdisclosing
Ethics & a particular disclosure
HC-MS-510a.2 interactions with health care professionals. Healthcare Professionals
topic identified in the SASB Standard for its industry. Here, the company either directs the user
to a separate data table where the related quantitative metric is disclosed, or guides users to the
section of the report that offers qualitative information.
If a disclosure topic in a SASB Standard or Industry-based Guidance is not applicable to a
company, the company is not obligated to disclose it.

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 FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHAT INVESTOR-FOCUSED SUSTAINABILITY INFORMATION

ARE COMPANIES REPORTING? CONT’D

PROVIDING CONTEXT

QUANTITATIVE Hawaiian Electric, 2020 ESG Report

HEI HAWAIIAN ELECTRIC AMERICAN SAVINGS BANK HEI FOUNDATION QUANTITATIVE

Board Sustainability Expertise

RACIAL DIVERSITY — ALL WORKFORCE age, marital status, arrest and co
Our board has the right expertise to oversee our HEI enterprise and strategies. Below
disability, military service or other
we’ve highlighted the ESG expertise of seven of our independent directors who have direct 4.4% 0.4%
experience related to ESG topics, including renewable energy, climate change strategy, Hispanic Black
environmental management, and sustainable investing. 9.8% 0.4% Our affirmative action efforts inclu
Native Hawaiian American Indian women, minorities, individuals wi
or Other Pacifc or Alaska Native
Celeste Connors is a climate risk expert and has advised U.S. presidents BOARD OF DIRECTORS
Islander and partnering with organizations
and other officials on clean energy and sustainable development. She COMPOSITION inclusion. For example, as part o
served as Director for Climate Change & Environment at the National (9 of 10 are independent) conduct outreach to agencies th
10 .7%
Security Council and National Economic Council. She is Executive Director White with disabilities, including Nationa
TENURE 53.0%
of Hawai‘i Green Growth Local2030 Hub, one of the world’s first U.N.- Asian Program, Wounded Warriors Pro
recognized local sustainability hubs.
State of Hawai‘i Vocational Reha
> 10 yrs
Richard Dahl oversaw the development of sustainability strategies as 20%

President & COO of Dole Food Company. Under his leadership, Dole 21.2% < 3 yrs Employee engagement and s
60% Two or7-10 yrs Races
More 50%
invested in a number of sustainability initiatives. Dole was named one 20% Employee engagement is key to
of the World’s Most Ethical Companies by Ethisphere Magazine and rewarding place to work. Our CE
20% undertook a carbon offset program to secure a carbon neutral operating 3-6 yrs
10% regular “talk story” sessions with
Diversityfootprint.
and inclusion continuous dialogue and better
Our highly diverse workforce is a reflection of the unique
Average tenure: 5.6 Years
10% Hawaiian Electric is rooted in a culture of ‘ohana, where needs of employees.
diversity of Hawai‘i. While we strive to have hiring practices
Peggy
inclusion and Fowler are
belonging waspart
CEOoffor
ourPortland
social General Electric
fabric. We see (PGE) when PGE
building a strong culture to support the that promote AGEa diverse workforce, our high diversity numbers
10% made
diversity — the strategic
of people, decision toexperiences,
backgrounds, reduce its use of oil andand
thoughts, coal. Under her
and sustainability of our company and naturally reflect the community in which we operate. The We conduct employee engagem
leadership,
perspectives wind and
— as giving solar
us an projects were
advantage constructed
that helps us meet and integrated into
following chart
> 70 shows< 50 the racial composition of our state. This year cycle, and, more recently, c
the PGE
our customers’ grid. and
needs PGEachieve
has beenourranked #1 on multiple occasions for selling
goals. 20%
more renewable power to residential customers than any other U.S. utility. may differ from labor20%market availability, as the following data Transitioning our business to 10
cellence in performance; committing to high- reflects our entire community and thus includes individuals who a lot of change for our employee
30% Hawaiian Electric’s workforce is highly racially diverse. As 50-59
o customers and a clear path to employees Micah Kane leads the Hawai‘i Community Foundation, Hawai‘i’s largest are not part of the labor
60-59 20% market, for example, those who have helping them feel confident with
rsonal and professional growth reflected in our 2019 EEO-1 data, 89% of our total workforce is 40%
foundation. A Native Hawaiian community leader, he brings invaluable not yet reached working age or are retired.
15% racially diverse, as are roughly 85% of our leaders and almost With operations on five different
experience in understanding Hawai‘i’s complex cultural and land use
urtesy and friendliness in satisfying our 69% of our executives. 29% of our total workforce is female, as Company initiative a few years a
history. He has worked to bring the community together to address Average age: 60.6 Years
15%
ouraging their support in the community, and are nearlyimportant
26% of leaders and nearly
issues facing 38%
Hawai‘i, of our sustainability,
including executives. homelessness RACIAL COMPOSITION OF HAWAI‘I by standardizing and streamlinin
mployee morale and affordable housing. GENDER 0.1% across our islands. This also hel
5% American Indian employees that we operate as a
1.9% or Alaska Native
oyees to be productive and efficient in a Mary Powell served as President & CEO of Green Mountain Power Black value to our customers. At the e
0.1%
5%
t-paced environment Diversefrom 2008 to 2020. Under her leadership, the company became the
Representation 10.7% Other pulse survey to measure employ
world’s first utility to become a Certified B Corporation (a business that Hispanic Male
Female efforts to manage the changes t
balances purpose and Female Racially
profit). Ms. Powell led anDiverse 1
ambitious energy vision 50%
9.5%
50%
kforce Company, and also obtain feedb
sition, EoT,with the business goal of providing to2 dramatically ramp up local renewable resources68.8%
in Vermont. Native Hawaiian
30% Executives 37.5% or Other Pacifc adapting. The results indicated t
ilience,
Leaders3 25.8% 84.9% Islander need for One Company and ack
Jim Scilacci has extensive experience overseeing the financial aspects 36.7%
ormance by utilizing the synergy of teams; All Workforce4
29.0%and managing risks,
of utility clean energy transitions 89.3%
including ESG-
Asian working to address employee co
maraderie and looking out for one another to related risks such as climate change impacts. His career includes serving
entive 21.7%
rmance as CFO of Edison International and its subsidiary Southern California ETHNICITY Workforce Stability
White
Edison, a leading utility with respect to grid modernization, transportation Native We seek to provide compensatio
Hawaiian
yle
tiveof interaction,
opportunity for communication, and family electrification and renewable energy. Asian 10% market-competitive, and interna
10% and retain highly skilled employe
sportfolio
unique standard
to Hawai‘i; acting with humility, 19.3%
s to achieve 40% Eva Zlotnicka has a background in utilizing markets, policy, and Two or More Races to provide customers and comm
ai‘i’s environment and cultural practices, and
d of that time. We’re
he community partnerships to motivate the private sector to simultaneously improve Caucasian and clean energy.
y 2022: 80% Bureau American Community Survey — Data Profile
sustainability, profitability and competitiveness. She is a co-founder of Source: 2018 U.S. Census

et Max. Inclusive Capital Partners, an investor in HEI and previously served as the Physical well-being. Our healt
rogram seeks to instill five behavioral
40% 50% U.S. lead ESG equity research analyst at Morgan Stanley.
out the organization: 1) Customer- 1 Racially diverse defined as all races/ethnicities that are not ‘White.’ Hiring and promoting individuals from diverse backgrounds medical, dental, vision, prescript
ble, 3) Accountable, 4) Empowered, and is very important to us. We are committed to providing equal accidental death & dismemberm
2 Executives includes EEO-1 category 1.1 - Executive/Sr. Level Officials
ch year, WeConnect champions and their employment opportunity in all13operations and all areas of disability insurance, worker’s com
3 Leaders includes EEO-1 category 1.2 - First/Mid-Level Officials flexible spending accounts. Well
on plans to strengthen company culture employment practices. We strive to provide for employment
ensions. This also helps nurture and develop 4 All Workforce includes EEO-1 categories 1.1 - Executive/Sr. Level Officials, 1.2 - First/ opportunities in a manner that does not discriminate on the basis include sick leave, an employee
Mid-Level Officials, 2 - Professionals, 3 - Technicians, 5 - Administrative Support Work-
ange-ready workforce. ers, 6 - Craft Workers, 7 - Operatives, 8 - Laborers and Helpers, 9 - Service Workers
of race, ancestral origin, color, religion, gender, national origin, wellness education programs as

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHAT INVESTOR-FOCUSED SUSTAINABILITY INFORMATION

ARE COMPANIES REPORTING? CONT’D
…PROVIDING CONTEXT

Hawaiian Electric, 2020 ESG Report

A US-based company operating in the Electric Utilities industry & Power Generators
industry.
Hawaiian Electric provides governance information about the sustainability expertise of its board
members, rather than just listing qualifications. It also offers narrative context for company diver-
sity statistics, offering insight into the diversity of the company compared with that of the broader
community.
Qualitative information and surrounding context can be necessary for investors to fully
understand a firm’s management of specific sustainability-related risks and opportunities.
Context surrounding governance, strategy and risk management can offer more complete,
decision-useful information.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 143

 FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

WHAT INVESTOR-FOCUSED SUSTAINABILITY INFORMATION

ARE COMPANIES REPORTING? CONT’D
…PROVIDING CONTEXT

Frontline, 2018 ESG Report

7. DISCLAIMER AND ASSUMPTIONS FOR

THE SASB REPORTING
The information provided is based on the best data avail- fSpills and releases to the environment (Number, Cubic meters (m³)):
Any overboard spills and releases – intentional or accidental – shall be
able at the time of reporting. The ESG disclosures should
reported, even if the quantity is low and i.e. only causes a thin film or
be used to understand the overall risk management of sus- slight sheen upon or discoloration of the surface of the water.
tainability related issues, however, in some areas data are
based on estimates, please see comments below. Lost time incident rate (LTIR): A lost time incident is an incident that
results in absence from work beyond the date or shift when it occurred.
aCO2 emissions (Metric tons (t) CO₂-e): Calculations are based on IMO The rate is based on: (lost time incidents) / (1,000,000 hours worked).

emission factors and fuel consumption for the year. The financial control
approach defined by the GHG Protocol has been applied (Scope 1). This gMarine Casualties: Regarding SASB TR-MT-540a.1 – we have defined
includes company owned vessels only (note that this does not reflect the the threshold for reporting on material damages as outlined in 1.1.4 and
Total fleet count as that number includes vessels on leaseback agree- 1.1.6 as USD 1,000,000. The marine casualty reported relates to physical
ments and long-term contracts). damages to Front Hakata, described on page 10 – note that the incident

AIMER AND ASSUMPTIONS FOR

did not result in any loss of life or serious injuries to people. Injuries to
personnel as described in point 1.1.1 are reported as part of Health &
Total energy consumption (TJ): Calculated based available data on fuel
Safety statistics (LTIR).
purchases by using the fuel properties defined by DEFRA, Conversion
factors, 2019. Scope includes entire fleet, excluding Dewi Maswara.
hNumber of Conditions of Class or Recommendations: The practice of
issuing conditions/recommendations of class does not follow an entire-

SB REPORTING
bAverage Energy Efficiency Design Index (EEDI) for new ships: The
ly harmonized reporting methodology making it less useful for reporting
EEDI provided represents Front Polaris and thus not necessarily reflect
purposes without further explanations, hence we do not disclose these
the average EEDI of the other three new ships entering the fleet in 2018.
numbers. We may consider disclosing information on this in the future
if the methodology becomes standardised. Currently our scope of dis-
cParticulate matter (PM), NOX, SOX emissions (Metric tonnes): NOX closure only includes Conditions of Class that resulted in withdrawal,
and SOX emissions from the combustion of fuels from owned vessels suspension, or invalidation of a vessel’s Class certificate.
have been calculated based on the tool established by Danish Shipping.
Scope includes entire fleet. iPort State Control: Number of port state control (1) deficiencies and (2)
detentions. Practices of port state controls reporting on deficiencies do
dShipping duration in marine protected areas or areas of protected con- not follow an entirely harmonised methodology making it less useful for
servation status: A marine protected area as defined by the International reporting purposes without further explanations, hence we do not dis-
Union for Conservation of Nature (IUCN): Any area of intertidal or close these numbers. We may consider disclosing information on this in

d is based on the best data avail- fSpills and releases to the environment (Number, Cubic meters (m³)):
sub-tidal terrain, together with its overlying water and associated flora,
fauna, historical and cultural features, which has been reserved by law or
the future. Currently our scope of disclosure only includes detentions.
A detention is defined as an intervention action by the port state, taken
other effective means to protect part or all of the enclosed environment, when the condition of a ship or its crew does not correspond substan-
Any overboard spills and releases – intentional or accidental – shall be
rting. The ESG disclosures should listed in the World Database of Protected Areas (WDPA) and mapped on tially with the applicable conventions and that a ship represen t an
Protected Planet. Protected Planet is the most up to date and complete unreasonable threat of harm to the marine environment etc.
reported, even if the quantity is low and i.e. only causes a thin film or
source of information on protected areas, updated monthly with submis-
he overall risk management of sus- slight sheen upon orjelled
discoloration
sions from governments, non-governmental organizations, landowners
Total
and communities. It is managed by the United Nations Environment of the
distance traveled by vessels: surface
The distance ofmiles)
(in nautical thetrav-water.
by all vessels during the calendar year.

, however, in some areas data are

World Conservation Monitoring Centre. However, the reported number
does not necessarily include all Marine protected areas internationally
established and regulated in International the Marine Organization (IMO) Number of shipboard personnel: Only the number of personnel on

se see comments below. Lost time incident rate number(LTIR):

Conventions and areas established nationally by member states. The
data on shipping duration in Marine Protected Areas has been obtained of shipboardA lostduring
personnel time incident is an incident that
board ships at any time are recorded, this does not reflect the aggregate
the year.

results in absence from work beyond the date or shift when it occurred.
through our tracking system (IHS).

Operating days: Operating days are calculated as the number of avail-

Thewater
ePercentage of fleet implementing ballast rate is based
exchange and treat-on:able
(lost time
days in incidents)
a reporting period minus the/ (1,000,000
aggregate number hours
of days worked).
(t) CO₂-e): Calculations are based on IMO
ment: Only ships performing ballast water exchange with an efficiency that the vessels are off-hire due to unforeseen circumstances (i.e., a
of at least 95 percent volumetric exchange of ballast water have been measure of days in a reporting period during which vessels actually
umption for the year. The financial
included. When control
it comes to treatment, approved systems must dis- generate revenue).

Protocol has been applied than

(Scopeor equal 1).
to 50This
gMarine
charge (a) less than 10 viable organisms per cubic meter that are greater
micrometers in minimum Casualties:
dimension and (b) less Regarding SASB TR-MT-540a.1 – we have defined
Number of vessels in total shipping fleet: This reflects the fleet at
els only (note that this does innot reflect the
than 10 viable organisms per milliliter that are less than 50 micrometers
minimum dimension the
and greater than threshold
or equal forinreporting
to 10 micrometers Dec 31 2018 on material
and includes damages
owned vessels asonoutlined
(46), 4 vessels long term in 1.1.4 and
contracts, year end 2018. Although GHG emissions Scope 1 only cover
ber includes vessels on leaseback agree- 1.1.6 as USD 1,000,000.
minimum dimension. Figures inlcude the total shipping fleet.
ownedThe marine
vessels, operationalcasualty reported
parameters throughout the reportrelates
refer to to physical
activity over the entire year,including vessels in on long term contracts
s). damages to Front Hakata, and vesselsdescribed on page 10 – note that the incident
sold during the year.

did not result in any loss of life or serious injuries to people. Injuries to
personnel as described in point 1.1.1 are reported as part of Health &
): Calculated based available15 • data
DISCLAIMERon AND
INTRODUCTION fuelASSUMPTIONS FOR SASB REPORTING
Safety statistics (LTIR).
roperties defined by DEFRA, Conversion
entire fleet, excluding Dewi Maswara.
hNumber of Conditions of Class or Recommendations: The practice of
issuing conditions/recommendations of class does not follow an entire-
Design Index (EEDI) for new ships: The
ly harmonized reporting methodology making it less useful for reporting
nt Polaris and thus notCOPYRIGHT
necessarily © 2023reflectIFRS FOUNDATION. ALL RIGHTS RESERVED 144
purposes without further explanations, hence we do not disclose these
three new ships entering the fleet in 2018.
numbers. We may consider disclosing information on this in the future
if the methodology becomes standardised. Currently our scope of dis-
FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

A Norway-based company operating in the Marine Transport industry.

Frontline offers useful context for understanding data reported for marine casualties, where data
was based on estimates and one main incident. Notably, the company uses the codes established
in the Technical Protocol for the Standard as a reference, thus clearly identifying events related to
the disclosure topic and providing transparency into its implementation process.
Qualitative information can also be extremely helpful in clarifying uncertainties and estimates
where companies are not able to provide the most accurate measures.

Key Takeaways
What sustainability information a company chooses to report can take many forms. Where a
company does not fit neatly into one SICS industry, companies often choose to use disclosure
topics and metrics from multiple industries. When applying the SASB Standards, companies
sometimes find that a topic provided for one industry is not applicable to their firm or does not
faithfully represent the sustainability-related risk or opportunity identified. In these cases, compa-
nies may forego the disclosure of certain topics and metrics and refer to the sources of guidance
designated by the IFRS Sustainability Disclosure Standards. In various public forums, many inves-
tors have indicated that when they notice a company has omitted or changed metrics within
the SASB Standards without providing an explanation, they might assume the worst about the
company’s ability to manage the related risk or opportunity. Many companies also find that the
usefulness of reported information is enhanced with additional context by adding qualitative or
narrative information and by clarifying uncertainties.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 145

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

12.5. HOW IS INVESTOR-FOCUSED SUSTAINABILITY

INFORMATION BEING DISCLOSED?

PUBLISHING ASSURANCE STATEMENTS

Interface, Inc., 2019 SASB Index

Sustainability Accounting Standards Board (SASB) Index – 2019

ACCOUNTING
TOPIC METRIC CODE RESPONSE VERIFIED
(1) Total energy 1) In 2019 Interface consumed 559,723 GJ of energy in manufacturing.
Energy
Management in
consumed, (2)
percentage grid CG-BF-130a.1
2) 44% of electricity use in manufacturing was grid electricity, while 54% was thermal energy.
3) 100% of the electricity was renewable or made renewable through the purchase of Renewable Energy Credits

Third-party
electricity, (3) (RECs). 75% of Interface’s total energy usage, both electricity and thermal, comes from renewable sources
Manufacturing verified by Apex
percentage renewable through direct purchase or renewable energy credits.

Interface has established an aggressive approach to the management of chemicals in our raw materials and
finished products. Interface’s goal is to have zero chemicals of concern in our products.
Description of Interface determines chemicals of concern based on a rigorous review of medical and scientific literature,
processes to assess regulations and market trends and adopts global goals for their substitution and phase out for all product inputs.
and manage risks Using this approach, Interface has phased out the use of numerous categories of chemicals including the
CG-BF-250a.1
and/or hazards elimination of ortho-phthalate esters, formaldehyde, fluorocarbons and flame retardants.
associated with Making products that are safe to use is only a starting point for creating sustainable and healthy products. In
Management of chemicals in products addition to being screened for chemicals of concern, every material used in Interface products must meet stringent
Chemicals in requirements for contribution to product performance, carbon footprint reduction, elimination of virgin raw materials,
and recyclability at the product’s end of life.
Products
Percentage of eligible
products meeting
volatile organic
All Interface flooring (100%) meets indoor air quality standards for low VOC emissions. This is certified through 
CG-BF-250a.2 several IAQ standards including CRI Green Label Plus, FloorScore, ACCS, GUT, GreenTag, Blue Angel, CDPH, Certified through
compound (VOC)
GreenGuard and other regionally specific standards. various product
emissions and content standards
standards

A US-based company operating in the Building Products & Furnishings industry.

By providing a ‘Verified’ column in the appendix where investor-focused sustainability data is
reported, Interface clearly distinguishes which information has been assured and identifies the
1

assurance provider.
The IFRS Sustainability Disclosure Standards are designed to support independent,
third-party verification, and an increasing number of companies are electing to have their
sustainability disclosures. Assurance signals to report users that the information is reliable,
but the assurance process can also have internal benefits.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 146

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

TABLE OF CONTENTS GLOSSARY CEO MESSAGE OVERVIEW & APPROACH TCFD TOPICS ESG TOPICS DATA & APPENDIX

Operating production 2015 2016 2017 2018 2019 % change Footnote GRI SASB SDG Assurance
Gross production, Total (m³OE/d) 69,598 70,231 91,059 74,744 71,109 -5% OP-01; OP-03 EM-EP-000.A 7.1

HOW IS INVESTOR-FOCUSED SUSTAINABILITY

before royalties Oil (bbls/d) 85,504 78,151 72,415 6,165 5,440 -12% OP-02; OP-03 EM-EP-000.A 7.1
Natural gas (MMscf/d) 471 430 795 566 490 -13% OP-03 EM-EP-000.A 7.1
Oil sands bitumen (m³OE/d) 44,569 47,691 57,039 57,733 56,370 -2% OP-01; OP-03 EM-EP-000.A 7.1
Total (BOE/d)
Oil sands bitumen (bbls/d)
434,721
280,468
INFORMATION BEING DISCLOSED? CONT’D
438,981
300,112
573,022
358,942
470,383
363,332
447,508
354,754
-5%
-2%
OP-01; OP-03
OP-03
102-7
102-7
EM-EP-000.A
EM-EP-000.A
7.1
7.1
OP-01 Gross production numbers are disclosed in this report and converted to oil equivalents because we use these values to calculate our emissions and water intensities. Reported production values are derived from gross operating production data from Petrinex (Canada’s Petroleum
…PUBLISHING ASSURANCE STATEMENTS
Information Network) and as such will vary from net production values reported in our financial reports which reflects Cenovus’s ownership share. Natural gas is converted using a factor of 0.971 m³OE per 10³m³ natural gas. Bitumen and oil are converted to m³OE from m³ using a 1:1
conversion factor.
OP-02 Oil includes oil production from our conventional assets, natural gas liquids and condensate.
OP-03 In 2019, we began reporting using the SASB Oil & Gas - Exploration and Production Standard. With the change in standard, we revised our production reporting methodology and re-reported our 2018 total production volumes to reflect our change in methodology. Our production
volumes decreased in 2019 due to the mandatory curtailment program put in place by the Government of Alberta to limit production.

Cenovus Energy, 2019 ESG2015Report

Leadership & governance
Business conduct investigations
2016 2017
27 18 23
2018
30
2019
29
% change Footnote
-3% GV-01
GRI SASB SDG Assurance

Integrity Helpline intakes 117 81 84 64 78 22%

GV-01 Investigations can include (but are not limited to) compliance with laws and regulations, conflict of interest, fraud, confidentiality and disclosure and other potential breaches of policies and practices.
TABLE OF CONTENTS GLOSSARY CEO MESSAGE OVERVIEW & APPROACH TCFD TOPICS ESG TOPICS DATA & APPENDIX

GHG emissions 2015 2016 2017 2018 2019 % change Footnote GRI SASB SDG Assurance
Gross total scope 1 GHG emissions Company-wide 5.94 6.54 8.41 8.56 8.56 - EM-01; EM-12 305-1 EM-EP-110a.1 13.1 Reasonable
LD-05
(MMt CO2e)In 2019, we began tracking these metrics to evaluate progress on our land & wildlife targets. Restoration ratio is calculated by dividing the total net area (hectares) under restoration (including completed projects), divided by total operations area leased within caribou range. Overlapping,
Oil sands 4.69 5.43 6.30 6.79 6.97 3% EM-01; EM-12 305-1 EM-EP-110a.1 13.1 Reasonable
persistent disturbance is subtracted from our restored area. Total area under restoration includes completed projects as well as those actively under restoration. Cumulative and total spend on caribou habitat restoration values reflect restoration costs that are inclusive of tree planting and
Gross total other
scopeassociated
2 GHG expenses.
emissions Values are Company-wide 1.29 effectiveness
not inclusive of costs associated with restoration 1.25 monitoring 1.04
and research0.38 0.24 response.-38%
on plant and animal Cumulative valueEM-02;
reflects EM-12 305-2
spend since January 1, 2016. 13.1 Reasonable
(MMt CO2e)In 2019, we began tracking this metric inOil
LD-06 accordance
sands with the SASB Oil & Gas - Exploration
0.38 & Production
0.40 Standard. We modified
0.06 the metric for0.06
0.05 calculation simplicity
28% and it is calculated by dividing our operating305-2
EM-02; EM-12 leased area impacted by caribou range, by our total
13.1operating leased area.
Reasonable
Gross hectare acreage numbers are based on acreage counts per lease. Mineral leases falling within a caribou range (Alberta & British Columbia) or intersecting a caribou range have been counted as acreage falling within the caribou range.
Gross total scope 1 & 2 GHG emissions Company-wide 7.2 7.8 9.5 8.9 8.8 -2% 13.1
(MMt CO2e)
Water stewardship
Gross total scope 1 GHG emissions Company-wide 2015
0.23 2016
0.26 2017
0.25 2018
0.31 2019
0.33 % change EM-03;
5% Footnote
EM-12 GRI
305-4 SASB SDG
7.3; 13.1 Assurance
Reasonable
intensity
Total (t CO2e/m³OE)
non-saline water withdrawn Company-wide
Oil sands 3,069
0.29 3,068
0.31 3,651
0.30 2,989
0.32 3,320
0.34 11%
5% WS-01; WS-02
EM-03; EM-12 303-3
305-4 EM-EP-140a.1 6.4; 6.6
7.3; 13.1 Limited
Reasonable
(10³m³)
Gross total scope 2 GHG emissions Oil sands
Company-wide 1,843
0.051 2,403
0.049 3,013
0.031 2,736
0.014 3,273
0.009 20%
-35% WS-01;
EM-04: WS-02
EM-12 EM-EP-140a.1 6.4; 6.6
7.3; 13.1 Limited
Reasonable
intensity
Total (t CO2e/m³OE)
non-saline water consumed Company-wide
Oil sands 2,756 2,839
0.024MESSAGE
0.023 2,555
0.003 2,800 3,192
0.002 & APPROACH
0.003 14%
31% WS-01;
EM-04; WS-02 EM-EP-140a.1 6.4; 6.6
TABLE OF CONTENTS GLOSSARY CEO OVERVIEW TCFDEM-12
TOPICS ESG TOPICS 7.3; 13.1 Reasonable
DATA & APPENDIX
(10³m³)
Gross total scope 1 & 2 GHG emissions Oil sands
Company-wide 1,601
0.28 2,193
0.30 2,168
0.28 2,565
0.33 3,162
0.34 23%
3% WS-01; WS-02 EM-EP-140a.1 6.4; 6.6
7.3; 13.1
intensityof
Volume CO2e/m³OE)
(t produced water (10³m³) Percentage discharged (%) 0 0 0 0 0 - WS-01 EM-EP-140a.2 6.4; 6.6
Methane emissions Percentage injected (%)
Company-wide 66
0.53 58
0.44 44
0.93 19
0.92 20
0.83 5%
-9% WS-01;
EM-05; WS-03
EM-12 305-1 EM-EP-140a.2 6.4;
13.1 6.6
Safety
(MMt CO e) Percentage
Oil sands recycled (%)
2015
46
0.03
2016
51
0.02
2017
46
0.02
2018
91
0.04
2019
88
0.03
% change WS-01;
-3%
-19%
Footnote
EM-05; WS-03
EM-12
GRI
305-1
SASB
EM-EP-140a.2
SDG
6.4;
13.1 6.6
Assurance
2
Total recordable incident rate (TRIR) Employees 0.14 0.18 0.15 0.18 0.15 -17% HS-01; HS-02 403-9 EM-EP-320a.1 8.8
Percentage of gross global scope 1 Total
Company-wide 70,939
8.93 73,114
6.67 89,735
11.05 50,816
10.72 52,398
9.75 3%
-9% WS-01
EM-05 EM-EP-140a.2
EM-EP-110a.1 6.4;
13.1 6.6
(rate) Contractors
emissions
Volume offrom methane
flowback (%)
(10³m³) Percentage
Oil sands discharged (%) -0.46
0.70 -0.50
0.41 0.43
0
0.34 0.26
0
0.57 0.35
0
0.45 -35%
-22% HS-01;
EM-05 HS-02
WS-01; WS-04 403-9 EM-EP-320a.1
EM-EP-140a.2
EM-EP-110a.1 8.8
6.4;
13.1 6.6
New workers
Percentage injected (%) -- -- -
100 -
100 0.09
100 -- HS-01; HS-02;
WS-01; WS-04HS-06 EM-EP-320a.1
EM-EP-140a.2 8.8 6.6
6.4;
Cenovus 2019 ESG report Total(%)
Percentage recycled -0.39 -0.42 0.36
0 0.25
0 0.30
0 -20% HS-01; HS-02
WS-01; WS-04 403-9 EM-EP-320a.1
EM-EP-140a.2 8.8 6.6
6.4; 74
Near miss frequency rate Total Employees - - 19
- 35
- 16.48 -97%
- WS-01; WS-04
HS-02; HS-05 EM-EP-140a.2
EM-EP-320a.1 6.4;
8.8 6.6
(rate) water intensity (bbl/BOE)
Fresh Company-wide Contractors 0.12
- 0.12
- 0.11
- 0.11
- 0.13
3.50 17%
- WS-01; WS-05
HS-02; HS-05 EM-EP-320a.1 6.4;
8.8 6.6 Limited
Oil sands New workers 0.11
- 0.14
- 0.14
- 0.13
- 0.16
0.11 22%
- WS-01; WS-05 HS-06
HS-02; HS-05; EM-EP-320a.1 6.4;
8.8 6.6 Limited
Percentage of non-saline withdrawn in regions with high orTotal
extremely -- -- -- -- 0 -- WS-01; WS-06 EM-EP-140a.1 6.4;
8.8 6.6
A Canada-based company operating
Fatality rate 0.0 0.0
in
high baseline water stress (%)
0.0
the0.0 Marine
0.0
Transport
- HS-02
industry.
Employees
4.30 HS-02; HS-05 EM-EP-320a.1
EM-EP-320a.1 8.8
Percentage of non-saline water consumed in regions with high or - - - - 0 - WS-01; WS-06 EM-EP-140a.1 6.4; 6.6
(rate) Contractors 0.0 0.0 0.0 0.01 0.0 - HS-02 EM-EP-320a.1 8.8
extremely high baseline water stress (%)
Cenovus also provides assurance
Hydrocarbons water discharged to environment (tonnes) New workers -0.0 information
-0.0 -0.0 -0.0within
0.0 data
0 - tables.
HS-02; HS-06Here, the company
WS-01 EM-EP-320a.1
EM-EP-140a.2 identifies
8.8 6.6
6.4; the
Percentage of hydraulically fractured wells for which thereTotal
is public -0.0 -0.0 0.0
100 0.01
100 0.0
100 - HS-02 WS-07
WS-01; 403-9 EM-EP-320a.1
EM-EP-140a.3 8.8 6.6
6.4;
metrics
disclosure
Average
Percentage
of
hoursall
ofthat have
fracturing
health,
of hydraulically
fluid
safety, and undergone
chemicals used
emergency (%) Employees
fractured wells where ground or
reasonable
-
surface water --
-
--
assurance,
-
--
-
--
12.50
0
those
-
--
that
HS-03
WS-01;
have undergone limited assurance,
EM-EP-320a.1 8.8
response training (hrs) Contractors 8.30 HS-03 WS-08 EM-EP-140a.4
EM-EP-320a.1 6.4;
8.8 6.6
and those that have not been
quality deteriorated compared to a baseline (%)
WS-01
New workers assured
- - at any
- level.
- -This -approach HS-03; HS-06offers transparency
EM-EP-320a.1 into
8.8 the type
In 2019, we began reporting metrics using the SASB Oil & Gas - Exploration & Production Standard. In agreement with the Alberta Ministerial Regulations and other Alberta regulations and policies, water with <4000 mg/L of TDS is referred to as non-saline. At Cenovus, our non-saline water

ofProcess
assurance achieved by the firm and communicates the reliability of disclosed data.
Total - - - - 11.63 - HS-03 EM-EP-320a.1
use represents all the water we used directly for oil production, potable camp water, dust suppression, ice road construction and drilling. 8.8
WS-02 Increase in total non-saline volumes withdrawn and consumed are a result of the mandatory curtailment program put in place by the Government of Alberta to limit production. Declining production in our oil sands operations results in less produced water and therefore more non-saline
safety event (PSE) rates Tier 1 0.01 0.0 0.03 0.05 0.01 -80% HS-04 OG-13 EM-EP-540a.1 8.8
makeup water is required to make steam. Maintaining steam (and therefore water) levels is required to maintain the health of our reservoir and be able to mobilize oil for production at a later date. Additionally, water volumes increased to support operations at Christina Lake with Phase G
(rate) coming online. Tier 2 0.03 0.05 0.12 0.09 0.07 -18% HS-04 OG-13 8.8
WS-03
HS-01 We inject produced
Recordable incidentswater that
include is unusable
lost-time due restricted-work
injuries, to composition. injuries
It is disposed,
as well either by wells
as medical or via third
aid injuries. partyaid
Medical disposal
injuriessites.
require medical attention but do not result in an employee being absent from work. Our 2018 TRIR was re-reported from 0.24 due to an error in calculation.

HS-02 Total recordable incident rate, near miss frequency rate, and fatality rates are calculated as (statistic count x 200,000)/hours worked.

HS-03 Average hours of health, safety, and emergency (HSE) response training calculated as (total qualifying training hours provided/total number of employees). In addition, we have a Contractor Portal which we use to deliver HSE training to our service providers, with an additional 0.86 hrs of
Cenovus 2019 ESG report training per service provider. We currently do not track training hours specific for new workers. 78
HS-04 PSE rates calculated as (total tier PSE count/total hours worked) x 200,000. Cenovus follows the CAPP Process Safety Event Reporting Guide, which is based on the American Petroleum Institute Recommended Practice 754 and the International Association of Oil and Gas Producers Report
456.
HS-05 In 2019, Cenovus began tracking near miss frequency rates in accordance with the SASB Oil & Gas - Exploration & Production Standard.

HS-06 In 2019, Cenovus began tracking this metric in accordance with the SASB Oil & Gas - Exploration & Production Standard. Cenovus defines a short service employee according to our New and/or Young Worker Standard (CEN-EHS139) - new to the worksite or new to the position at the
existing worksite where unfamiliar tasks present new hazards or any worker who is under 25 years of age.

Cenovus 2019 ESG report 80

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

HOW IS INVESTOR-FOCUSED SUSTAINABILITY

INFORMATION BEING DISCLOSED? CONT’D
…PUBLISHING ASSURANCE STATEMENTS

Deutsche Post DHL Group, Assurance Report within 2019 Sustainability Report

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

HOW IS INVESTOR-FOCUSED SUSTAINABILITY

INFORMATION BEING DISCLOSED? CONT’D

…PUBLISHING ASSURANCE STATEMENTS

Deutsche Post DHL Group, Assurance Report within 2019 Sustainability Report

FN-AC-330a.1 (continued)
A Germany-based company operating in the Air Freight & Logistics industry.
Percentage
Deutsche Postof genderits
verified and racial/ethnic
sustainability group representation
disclosures through an for (1) executive
assurance report provided by an
management, (2) non-executive management, (3)
independent service provider. Letters of assurance engagements offerprofessionals, and (4) all otherinto
insight employees
the type of
assurance performed, as well as the qualifications and practices adhered to by the practitioner
The tables below provide breakdowns of gender representation globally and racial/ethnic group representation for US
providing assurance
employees. services.
We have enhanced this year’s disclosure from our 2018 SASB disclosure to include year-over-year change
as well as a breakdown of racial/ethnic group representation among new hires. The symbols and associated
Publishing an
percentages assurance
represent statement
absolute often
year-over-year reflects
change the maturity
in representation of a company’s
in percentage points. internal data
collection processes, internal controls and board/management oversight over sustainability
data.
Gender Representation of Global Employees (%)

Female Male N/Ag

Executive Management a 22% +1.7% 78% (1.7%) 0% -

ORGANIZING AND FORMATTING

Non-Executive Management 29%
DATA
71%b
+0.4% (0.4%) <1% <+0.1%

c
Senior Leaders 29% +0.4% 71% (0.5%) <1% <+0.1%

Professionals d 44% +2.0% 55% (2.1%) <1% +0.1%

All Other Employees e 90% (0.3%) 10% +0.3% 0% -

BlackRock,
Total SASB Disclosure 2019
42% +1.6% 58% (1.6%) <1% <+0.1%

% of New Hires f 49% 51% <1%

Racial / Ethnic Group Representation of US Employees (%)

Black or
Hispanic or
Asian African White Otherh N/Ag
Latino
American

Executive Management a 22% 4% 3% 69% 0% 2%

+3.1% +1.2% (0.8%) (4.5%) - +1.0%

18% 3% 3% 72% 2% 2%
Non-Executive Management b
+0.9% (0.4%) - (1.9%) +0.4% +1.0%

18% 3% 3% 72% 2% 2%
Senior Leaders c
+1.0% (0.3%) (0.1%) (2.0%) +0.4% +1.0%

Professionals d 31% 6% 6% 52% 2% 3%

+0.3% +0.4% +0.9% (3.3%) +0.1% +1.6%

All Other Employees e 11% 15% 15% 53% 5% 1%

+0.9% (0.7%) +1.4% (3.5%) +0.9% +1.0%

Total 26% 5% 6% 58% 2% 3%

+0.5% +0.1% +0.6% (2.8%) +0.2% +1.4%

% of New Hires f 30% 8% 10% 43% 4% 5%

Data as of January 1, 2020.
a) Represents Executives/Senior Officers & Managers as defined by the EEO-1 Job Classification Guide.

A US-based company operating in the Asset Management & Custody Activities industry.
b) Represents First/Mid Officers & Managers as defined in the EEO-1 Job Classification Guide.
c) Represents a weighted average of executive management and non-executive management.
d) Represents Professionals and Sales Workers as defined in the EEO-1 Job Classification Guide.
To illustrate the disclosure topic Racial/Ethnic Group Representation of US Employees, BlackRock
e) Represents Administrative Support Workers as defined in the EEO-1 Job Classification Guide.
f) Represents new employees hired between January 2, 2019 and January 1, 2020.
not only provided 2019 percentages but also added percentage increase/decrease year-over-year
g) N/A represents not available or not disclosed.
to communicate how performance has changed. Additional trend-based data can add valuable
h) Other includes Native American or Alaska Native, Native Hawaiian or Pacific Islander, and “Two or More Races”.

context to the company’s performance.

See EEO-1 Job Classification Guide, available at https://www.eeoc.gov/employers/eeo1survey/jobclassguide.cf m for additional information.

BLACKROCK BlackRock, Inc. – 2019 SASB Disclosure | 9

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

HOW IS INVESTOR-FOCUSED SUSTAINABILITY

Topic INFORMATION
Information BEING DISCLOSED? CONT’D
(1) Average hourly wage and (2) percentage of In-store employees include cashiers, customerAND
service
…ORGANIZING FORMATTING DATA
in-store employees earning minimum wage, representatives, first-line supervisors/managers of retail sales
by region workers, retail salespersons, and stock clerks and order fillers.
These employees are generally classified in the U.S. Bureau of
SASB: CG-MR-310a.1 Labor Statistics (BLS) Standard Occupation Classification under the
Tractor Supply Co. (TSC), ESG Tear Sheet 2019
General Merchandise Stores subsector (NAICS 452).

TSC Stores Data

Count Above Count at Applicable
Region Average Hourly Rate Applicable Min Wage Min Wage % at Applicable Min

1 $12.60 1,884 91 4.60%

2 $14.10 2,081 314 13.10%
3 $12.46 2,282 147 6.10%
4 $12.78 2,392 5 0.20%
5 $12.40 2,240 73 3.20%
6 $11.89 2,217 0 0.00%
7 $13.43 1,927 95 4.70%
8 $14.19 1,959 598 23.40%
9 $13.05 2,192 1 0.00%
10 $12.02 2,234 2 0.10%
11 $12.00 2,278 0 0.00%
All TSC Stores $12.83 23,686 1,326 5.30%

Business Units
Count Above Count at Applicable
Average Hourly Rate Applicable Min Wage Min Wage % at Applicable Min

Petsense $12.70 1,093 50 4.40%

DCs $12.44 2,614 0 0.00%
Total Company $12.79 27,393 1,376 4.80%

(1) Voluntary and (2) involuntary turnover 2019 TSC Only: Voluntary Turnover Rate – 79%
rate for in-store employees 2019 TSC Only: Involuntary Turnover Rate – 9%

SASB: CG-MR-310a.2 Data reflects full-time and part-time in-store employees.

A US-based company operating in the Multiline and Specialty Retailers & Distributors
industry.
TSC presented data broken down by region and business unit. As it is a large retail chain, such
granular detail offers insight into performance in specific locations as well as performance related
2019 Tractor
to14unique Supply Company
business units. ESG Tear Sheets
Breaking down data into additional levels of detail can help users utilize the information and
make more informed decisions where aggregate numbers do not tell the whole story.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 150

 10 .7%
conduct outreach to agencies
White with disabilities, including Nati
53.0%
Asian Program, Wounded Warriors P
FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE State of Hawai‘i Vocational Re
STANDARDS

21.2% Employee engagement an

Two or More Races Employee engagement is key
rewarding place to work. Our
HOW IS INVESTOR-FOCUSED SUSTAINABILITY regular “talk story” sessions w
Diversity and inclusion
Hawaiian Electric is rooted in a culture of ‘ohana, where
INFORMATION BEING
Our highly diverse DISCLOSED?
workforce CONT’D
is a reflection of the unique continuous dialogue and bett
diversity of Hawai‘i. While we strive to have hiring practices needs of employees.
ort the inclusion and belonging are part of our social fabric. We see
that promote a diverse workforce, our high diversity numbers
and diversity — of people, backgrounds, experiences, thoughts, and We conduct employee engag
naturally reflect the community
…ORGANIZINGin which AND
we operate. The
FORMATTING DATA
perspectives — as giving us an advantage that helps us meet year cycle, and, more recentl
following chart shows the racial composition of our state. This
our customers’ needs and achieve our goals. Transitioning our business to
may differ from labor market availability, as the following data
ng to high- reflects our entire community and thus includes individuals who a lot of change for our emplo
mployees Hawaiian Electric’s workforce is highly racially diverse. As helping them feel confident w
QUANTITATIVE are not part of the labor market, for example, those who have
Hawaiian
reflected in our Electric,
2019 EEO-1 data, 89% of our 2020 ESGisReport
total workforce
not yet reached working age or are retired.
racially diverse, as are roughly 85% of our leaders and almost With operations on five differe
g our 69% of our executives. 29% of our total workforce is female, as Company initiative a few year
munity, and are nearly 26% of leaders and nearly 38% of our executives. RACIAL COMPOSITION OF HAWAI‘I by standardizing and streaml
RACIAL DIVERSITY — ALL WORKFORCE age, marital status, arrest and court record, sexual orientation,
0.1% across our islands. This also
disability, military service or other protected grounds.
4.4% 0.4% American Indian employees that we operate a
1.9% or Alaska Native
Hispanic Black Black value to our customers. At th
nt in a
9.8% 0.4% Our affirmative action efforts include initiatives0.1% relating to
Diverse Representation Native Hawaiian American Indian 10.7% Other pulse survey to measure emp
women, minorities,
Hispanic individuals with disabilities, and veterans,
or Other Pacifc or Alaska Native efforts to manage the change
Female Islander Racially Diverse 1 and partnering with organizations that promote opportunity and
roviding 9.5% Company, and also obtain fe
Executives 2
37.5% 68.8% Nativeinclusion.
Hawaiian For example, as part of our Affirmative Action Plan, we
or Other Pacifc adapting. The results indicate
10 .7%25.8%
conduct
Islander outreach to agencies that serve veterans and individuals need for One Company and a
Leaders3 84.9%
White with disabilities, including National Guard Employment 36.7% Support
f teams; All Workforce4 29.0% 89.3% 53.0% Asian working to address employee
Asian Program, Wounded Warriors Program, Alu Like, Inc., and the
another to State of Hawai‘i Vocational Rehabilitation Division.
21.7% Workforce Stability
White
We seek to provide compens
21.2% Employee engagement and satisfaction
and family Two or More Races market-competitive, and inter
Employee engagement is key to creating a desirable, inclusive,
umility, and retain highly skilled emplo
19.3%
rewarding place to work. Our CEO and executive team hold
tices, and Two or More Races to provide customers and co
regular “talk story” sessions with employees to encourage
and clean energy.
Our highly diverse workforce is a reflection of the unique Source: continuous
2018 U.S. Censusdialogue and better
Bureau American understand
Community theProfile
Survey — Data experiences and
a, where needs of employees.
diversity of Hawai‘i. While we strive to have hiring practices
oral
bric. We see Physical well-being. Our he
Previously that promote mentioned:
a diverse workforce, A US-based
our high diversity company
numbers operating in the Electric Utilities & Power medical, dental, vision, presc
Hiring and promoting individuals from diverse backgrounds
-s, thoughts, and 1 Racially diverse defined as all races/ethnicities that are not ‘White.’ We conduct employee engagement surveys on a two- to three-
d, andus meet
helps Generators industry.
naturally reflect the community in which we operate. The
is very important to us. We are committed to providing equal accidental death & dismembe
following
2 Executives includes EEO-1 category 1.1 - chart shows
Executive/Sr. Levelthe racial composition of our state. This
Officials year cycle, and, more recently, change management surveys.
nd their employment opportunity in all operations and all areas of disability insurance, worker’s
InEEO-1
addition -to narrative context, the company visualized Transitioning our
itspractices.
racial We business
diversity to 100% renewable
andforcompared energy means
employment it with flexible spending accounts. W
3 Leaders includes may1.2differ
category from labor
First/Mid-Level market
Officials availability, as the following data
culture employment strive to provide
reflects our entire community and thus includes individuals who a lot of change for our employees, and we are committed to
nd develop
verse. As the EEO-1
4 All Workforce includes racial composition
categories of Officials,
1.1 - Executive/Sr. Level Hawaii, providing additional
1.2 - First/ performance
opportunities in a mannerinsight
that does into
helping them feel confident with change.
the company’s
not discriminate on the basis D&I include sick leave, an employ
are not
Mid-Level Officials, 2 - Professionals, part of the
3 - Technicians, labor market,
5 - Administrative for Work-
Support example, those who have
practices.
otal workforce is ers, 6 - Craft Workers, 7 - Operatives, 8 - Laborers andworking
Helpers, 9age- Service Workers
of race, ancestral origin, color, religion, gender, national origin, wellness education programs
not yet reached or are retired.
rs and almost With operations on five different islands, we began a One
ce is female, as Companies often choose to visualize or otherwise communicate Company initiativesustainability
a few years ago to improve data usingefficiencies
r executives. charts, tables and RACIAL graphics
COMPOSITION to support
OF HAWAI‘Ieffective communication. by standardizing and streamlining best practice processes
0.1% across our islands. This also helped create a mindset among
American Indian employees that we operate as a single entity to provide the best
1.9% or Alaska Native
Black value to our customers. At the end of 2019, we conducted a
0.1%
10.7% Other pulse survey to measure employee views about leadership’s
Hispanic
efforts to manage the changes that resulted from One
acially Diverse 1
9.5% Company, and also obtain feedback on how employees were
68.8% Native Hawaiian
or Other Pacifc adapting. The results indicated that employees understood the
84.9% Islander need for One Company and acknowledged that leaders were
36.7%
89.3% Asian working to address employee concerns with the changes.

21.7% Workforce Stability

White
We seek to provide compensation that is comprehensive,
market-competitive, and internally equitable to attract, engage,
and retain highly skilled employees to advance our commitment
19.3%
Two or More Races to provide customers and communities with affordable, reliable,
and clean energy.
Source: 2018 U.S. Census Bureau American Community Survey — Data Profile

Physical well-being. Our health and welfare benefits include

te.’ Hiring and promoting individuals from diverse backgrounds medical, dental, vision, prescription drug, group life insurance,
is very important to us. We are committed to providing equal accidental death & dismemberment insurance, long-term
fficials
employment opportunity in all operations and all areas of disability insurance, worker’s compensation, long-term care, and
employment practices. We strive to provide for employment flexible spending accounts. Wellness and preventive programs
vel Officials, 1.2 - First/ opportunities in a manner that does not discriminate on the basis include sick leave, an employee assistance program, and other
rative Support Work-
- Service Workers
of race, ancestral origin, color, religion, gender, national origin, wellness education programs as available.

51
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 FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

HOW IS INVESTOR-FOCUSED SUSTAINABILITY

INFORMATION BEING DISCLOSED? CONT’D

TIME SERIES DATA

Cenovus Energy, 2019 ESG Report

SSARY TABLE OF CONTENTS
CEO MESSAGE
GLOSSARY CEO MESSAGE OVERVIEW & APPROACH OVERVIEW & APPROACH TCFD TOPICS ESG TOPICS DATA & APPENDIX TCFD TOPICS
Operating production 2015 2016 2017 2018 2019 % change Footnote GRI SASB SDG Assurance
Gross production, Total (m³OE/d) 69,598 70,231 91,059 74,744 71,109 -5% OP-01; OP-03 EM-EP-000.A 7.1
before royalties Oil (bbls/d) 85,504 78,151 72,415 6,165 5,440 -12% OP-02; OP-03 EM-EP-000.A 7.1
Natural gas (MMscf/d) 471 430 795 566 490 -13% OP-03 EM-EP-000.A 7.1

Total (BOE/d) 2015

Oil sands bitumen (m³OE/d)

Oil sands bitumen (bbls/d)

201644,569
434,721
280,468
47,691
438,981
300,112
57,039
573,022
358,942
2017 57,733
470,383
363,332
56,370
447,508
354,754
-2%
-5%
-2%
2018 OP-01; OP-03
OP-01; OP-03
OP-03
2019
102-7
102-7
EM-EP-000.A
EM-EP-000.A
EM-EP-000.A
% change Footnote
7.1
7.1
7.1

69,598 70,231 91,059 74,744 71,109 -5% OP-01; OP-03

OP-01 Gross production numbers are disclosed in this report and converted to oil equivalents because we use these values to calculate our emissions and water intensities. Reported production values are derived from gross operating production data from Petrinex (Canada’s Petroleum
Information Network) and as such will vary from net production values reported in our financial reports which reflects Cenovus’s ownership share. Natural gas is converted using a factor of 0.971 m³OE per 10³m³ natural gas. Bitumen and oil are converted to m³OE from m³ using a 1:1
conversion factor.
OP-02 Oil includes oil production from our conventional assets, natural gas liquids and condensate.
OP-03
85,504 78,151 72,415 6,165 5,440 -12%
In 2019, we began reporting using the SASB Oil & Gas - Exploration and Production Standard. With the change in standard, we revised our production reporting methodology and re-reported our 2018 total production volumes to reflect our change in methodology. Our production
volumes decreased in 2019 due to the mandatory curtailment program put in place by the Government of Alberta to limit production. OP-02; OP-03
Mscf/d) Leadership & governance
Business conduct investigations 471 430 2015
27
2016
18
2017
23 795 2018
30
2019
29 566
% change Footnote
-3% GV-01 490
GRI SASB
-13% SDG Assurance
OP-03
Integrity Helpline intakes 117 81 84 64 78 22%

en (m³OE/d) GV-01
44,569 47,691 57,039 57,733
Investigations can include (but are not limited to) compliance with laws and regulations, conflict of interest, fraud, confidentiality and disclosure and other potential breaches of policies and practices.
56,370 -2% OP-01; OP-03
GHG emissions 2015 2016 2017 2018 2019 % change Footnote GRI SASB SDG Assurance
Gross total scope 1 GHG emissions
(MMt CO2e)
434,721
Company-wide
Oil sands
438,981
5.94
4.69
6.54
5.43
8.41
6.30
573,022
8.56
6.79
8.56
6.97
-
3%
470,383 EM-01; EM-12
EM-01; EM-12
447,508
305-1
305-1
EM-EP-110a.1
EM-EP-110a.1
-5% 13.1
13.1
Reasonable
Reasonable
OP-01; OP-03
Gross total scope 2 GHG emissions Company-wide 1.29 1.25 1.04 0.38 0.24 -38% EM-02; EM-12 305-2 13.1 Reasonable
en (bbls/d) (MMt CO2e)
Gross total scope 1 & 2 GHG emissions
280,468
Oil sands
Company-wide
300,112
0.38
7.2
0.40
7.8
0.06
9.5
358,942
0.05
8.9
0.06
8.8
28%
-2%
363,332 EM-02; EM-12 354,754
305-2 -2% 13.1
13.1
Reasonable OP-03
(MMt CO2e)
d in this report and converted to1 GHG
Gross total scope oilemissions
equivalents because we
Company-wide 0.23 use
0.26these
0.25 values
0.31 to0.33calculate
5% our
EM-03; emissions
EM-12 and water intensities.
305-4 7.3; 13.1 Reported production values ar
Reasonable
intensity (t CO e/m³OE)
Previously mentioned:
inOil A Canada-based 0.014 company operating in the Marine Transport
sands 0.29 0.31 0.30 0.32 0.34 5% EM-03; EM-12 305-4
vary from net production values
Gross total scope reported
2 GHG emissions
2
our financial
Company-wide reports
0.051 0.049which
0.031 reflects Cenovus’s
0.009 -35% ownership
EM-04: EM-12 share. Natural gas is 7.3; 13.1
converted
7.3; 13.1
Reasonable
Reasonable using a factor of 0.971 m³
intensity (t CO e/m³OE)
industry.
2 Oil sands 0.024 0.023 0.003 0.002 0.003 31% EM-04; EM-12 7.3; 13.1 Reasonable
Gross total scope 1 & 2 GHG emissions Company-wide 0.28 0.30 0.28 0.33 0.34 3% 7.3; 13.1
intensity (t CO2e/m³OE)
onventional assets, natural gasemissions
Cenovus
Methane liquids
(MMt CO e)
and condensate.
offers five years of sequential
Company-wide
Oil sands
0.53
0.03
0.44
0.02 data
0.93
0.02 and calculates
0.92
0.04
0.83
0.03
-9%
-19% theEM-12percentage
EM-05; EM-12
EM-05;
305-1
305-1 change over
13.1
13.1 time.
2

Percentage of gross global scope 1 Company-wide 8.93 6.67 11.05 10.72 9.75 -9% EM-05 EM-EP-110a.1 13.1
ASB Oil & Gas - Exploration and Production Standard. With the change 0.34 in standard, we
-22%revised
EM-05 our production reporting methodology and re-reported our 20
Companies sometimes report 0.70time0.41series data when available. Such data supports report
emissions from methane (%) Oil sands 0.57 0.45 EM-EP-110a.1 13.1

mandatory curtailment program put in place by the Government of Alberta to limit production. 74
users in assessing the company’s performance year-over-year, offers trend-based insights,
Cenovus 2019 ESG report

comparison to benchmarks and targets, informs future projections and supports data
consistency.
2015 2016 2017 2018 2019 % change Footnote
27 18 23 30 29 -3% GV-01
117 81 84 64 78 22%
limited to) compliance with laws and regulations, conflict of interest, fraud, confidentiality and disclosure and other potential breaches of policies and practic

2015 2016 2017 2018 2019 % change Footnote

Company-wide 5.94 6.54 8.41 8.56 8.56 - EM-01; EM-12
Oil sands 4.69 5.43 6.30 6.79 6.97 3% EM-01; EM-12
Company-wide 1.29 1.25 1.04 0.38 0.24 -38% EM-02; EM-12
Oil sands 0.38 0.40 0.06 0.05 0.06 28% EM-02; EM-12
Company-wide 7.2 7.8 9.5 8.9 8.8 -2%

Company-wide 0.23 0.26 0.25 0.31 0.33 5% EM-03; EM-12

Oil sands 0.29 0.31 0.30 0.32 0.34 5% EM-03; EM-12
COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 152
Company-wide 0.051 0.049 0.031 0.014 0.009 -35% EM-04: EM-12
Oil sands 0.024 0.023 0.003 0.002 0.003 31% EM-04; EM-12
FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

HOW IS INVESTOR-FOCUSED SUSTAINABILITY

INFORMATION BEING DISCLOSED? CONT’D

DOWNLOADABLE SPREADSHEETS

Azul, Fundamentals and Spreadsheets, 2018

2014 - 2018
IAS 17

Fundamentals and Spreadsheets

Income Statement

Balance Sheet

Operating Data

ESK Key Indicators

Investor Relations Team

+55 11 4831 2880
[email protected]

Menu

ESG KEY INDICATORS 1S2018 1S2019 9M19 1S2020 9M20 2017 2018 2019
Environmental
Fuel
Total fuel consumed per ASK (GJ / ASK, million) 1,334.8 1,290.5 1,269.9 1,204.3 1,198.9 1,397.6 1,325.5 1,260.6
Total fuel consumed (GJ x 1000) 18,990.0 21,252.0 33,247.2 12,890.0 16,716.5 35,359.0 38,908.4 45,216.5
Fleet
Average age of operating fleet 5.9 5.9 6.0 6.0 6.3 5.6 5.9 5.8
Social
Labor Relations
Employee gender: (%) male 57.0 57.0 57.7 58.0 57.6 57.0 58.0 59.0
(%) female 43.0 43.0 42.3 42.0 42.4 43.0 42.0 41.0
Employee monthly turnover (%) 0.8 1.1 1.6 0.6 1.5 1.1 1.0 1.2
% of employee covered under collective bargaining agreements 100 100 100 100 100 100 100 100
Number and duration of strikes and lockout (# days) 0 0 0 0 0 0 0 0
Volunteers 1,553 2,034 2,094 2,169 1,659 1,499 1,914 2,193
Customer & Company Behavior
Amount of legal and regulatory fines and settlements
0 0 0 0 0 0 0 0
associated with anti-competitive practices
Safety
Number of accidents 0 0 0 0 0 0 0 0
Number of governmental enforcement actions and aviation safety 0 0 0 0 0 0 0 0
Governance
Management
Independent directors (%) 83.3 81.8 81.8 80.0 80.0 85.0 82.0 82.0
Percent of board members that are women 8.3 9.1 9.1 10.0 10.0 7.7 9.0 9.0
Board of directors average age 55.7 56.7 57.4 57.8 58.5 54.1 56.1 57.1
Director meeting attendance (%) 95.0 85.0 88.6 100.0 100.0 94.9 99.0 87.9
Board size 12 11 11 10 10 13 11 11
Participation of woman in leadership positions (%) 40.4 39.4 39.1 39.5 39.7 41.0 32.0 39.4

A Brazil-based company operating in the Airlines industry.

Azul’s investor relations team disclosed time series data alongside fundamental financial state-
ments through a downloadable Excel document.
Some companies opt to make their sustainability data readily available via spreadsheet to the
benefit of financial analysts and report users who wish to conduct their own data analysis.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 153

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

HOW IS INVESTOR-FOCUSED SUSTAINABILITY

INFORMATION BEING DISCLOSED? CONT’D

EMBRACING CONTINUOUS IMPROVEMENT

Jet Blue, ESG disclosures over multiple years

PART I
ITEM 1A Risk Factors
2015
We use our JetBlue Sustainability program on www.jetblue.com/green/ to Civil Reserve Air Fleet – We are a participant in the Civil Reserve Air
educate our customers and Crewmembers about environmental issues Fleet Program, which permits the U.S. Department of Defense to utilize
and to inform the public about our environmental protection initiatives. our aircraft during national emergencies when the need for military airlift
Our most recent corporate sustainability report for 2015 is available on exceeds the capability of military aircraft. By participating in this program,
our website and addresses our environmental programs, including those we are eligible to bid on and be awarded peacetime airlift contracts with
aimed at curbing greenhouse emissions, our recycling efforts and our the military.
focus on corporate social responsibility.
Foreign Ownership – Under federal law and DOT regulations, we must
TOPIC 1: ENVIRONMENInsurance
TAL FOOTPRINT OF FUEL USE
be controlled by U.S. citizens. In this regard, our president and at least
two-thirds of our board of directors must be U.S. citizens. Further, no
more than 24.99% of our outstanding common stock may be voted by
We carry insurance of types customary in the airline industry and at amounts
deemed adequate to protect us and our property as well as comply with
2016
non-U.S. citizens. We believe we are currently in compliance with these both federal regulations and certain credit and lease agreements. As a result
ownership provisions.
Management Approach:
of the terrorist attacks of September 11, 2001, aviation insurers significantly
reduced the amount of insurance coverage available to commercial airlines
Other Regulations – All airlines are subject to certain provisions of
JetBlue uses an integrated
the Communications Act of 1934 due to their extensive use of radio approach
for liability in assessing
to persons and employees
other than managing its sustainability
or passengers for claims performance,
resulting from acts of terrorism, war or similar events. This is known as war
and other communication facilities. where
They are material
also requiredESG
to obtain
risksan and opportunities are analyzed through their potential impact on the
risk coverage. At the same time, these insurers significantly increased the
aeronautical radio license from the FCC. To the extent we are subject
premiums for aviation insurance in general. The U.S. government agreed
environment,
to FCC requirements, we take all necessary society
steps to comply withand the financial
those performance of the company.
to provide commercial war-risk insurance for U.S. based airlines, covering
requirements.
losses to employees, passengers, third parties and aircraft. Prior to the
In recognizing the many potential risks driven by climate change, we work alongside industry
end of U.S. government war-risk insurance coverage, JetBlue obtained
Our labor relations are covered under Title II of the Railway Labor Act of
organizations
1926 and are subject to the jurisdiction of the NMB. Insuch as during
addition, IATAi, A4A ii
, and ICAO
comparable iii
coverageto establish a comprehensive
in the commercial market starting inand
MT CO e/ASM2014 Yeacollaborative
ras-opart
n-Year Change (%)
periods of fuel scarcity, access to aircraft fuel may be subject to federal
allocation regulations.
of our overall hull and liability insurance coverage. 2
approach to mitigating these risks. In 2016, JetBlue supported ICAO’s historic CORSIAiv agreement, 2017
joined The Roundtable on Sustainable Biomaterials, and signed one of the most significant
renewable jet fuel purchasing agreements in the world.
Where You Can Find Other Information
We follow a robust methodology in determining our sustainability goals where the magnitude,
Our website is www.jetblue.com. Information contained on our website is gov. You may obtain and copy any document we furnish or file with the
not part of this Report. Information wetimeframe and
furnish or file with thelikelihood of sustainability
SEC, including risks
SEC at the SEC’s and
public opportunities
reference room at 100are analyzed
F Street, to 1580,
NE, Room determine their
our Annual Reports on Form 10-K, Quarterly Reportsimpacts.
potential on Form 10-Q, Current Washington, D.C. 20549. You may obtain information on the operation of
Reports on Form 8-K and any amendments to or exhibits included in these the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330.
reports are available for download, free of charge, on our website soon after You may request copies of these documents, upon payment of a duplicating
such reports are filed with or furnished T
toR 02SEC.
the 01-Our 01SEC
: Grfilings,
ossincluding
global Scfee,opbye writing
1 emtoisthe sioSEC
nsat its principal office at 100 F Street, NE, Room
exhibits filed therewith, are also available at the SEC’s website at www.sec. 1580, Washington, D.C. 20549.

JetBlue’s total Scope 1 GHG emissions in 2016 were 7,484,799 MT CO2e. Detailed information about
our emissions in 2016 is presented in the table below:
ITEM 1A. Risk Factors
Amount (Metric Tonnes)
Emissions
Risks Related to JetBlue
7,417,431
Carbon Dioxide
We operate in an extremely competitive industry. Any business combination could significantly alter industry conditions
11 within the airline industry and could cause fares of our
and competition
Methane
The domestic airline industry is characterized by low profit margins, high competitors to be reduced. Additionally, if a traditional network airline
fixed costs and significant price competition in an increasingly concentrated were to fully6,7357
develop
competitive field. We currently compete with Calculaatiolow
n mcost
ethostructure,
dology foror
emifiswe
siowere
n discto
losexperience
ures
Nitrousairlines
other Oxide on all of our routes. increased competition from low cost carriers, our business could be
Most of our competitors are larger and have greater financial resources materially adversely affected.
JetBlue follows “The Climate Registry: General Reporting Protocol” to collect activity data and
We do not
and name recognition than we do. Following currently
our entry into newtrack
marketsthe hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride
or expansion of existing markets, some of our competitors have chosen Our business is calculate Scope 1 emissions.
highly dependent Globalof
on the availability warming
fuel andpotentials
fuel is are calculated from the
to add service or engage in extensive associated with our
price competition. Scope 1 emissions.
Unanticipated subject to price Intergovernmental
volatility. Policy on Climate Change (IPPC) Fifth Assessment Report (AR5 — 100-year)
shortfalls in expected revenues as a result of price competition or in the to convert our CH and N O emissions into CO e. CO , CH4, and NO2 emissions from jet kerosene
number of passengers carried would negatively impact our financial results Our results of operations are heavily impacted by the price and availability
4 2 2 2

Change in Emissions
and harm our business. The extremely competitive nature of the airline
and comprise
of fuel. Fuel costs diesel/gas oil are calculated
a substantial portion of using 2014operating
our total Climate Registry Emissions Factors. JetBlue uses
industry could prevent us from attaining the level of passenger traffic or expenses. Historically, fuel costs have been subject to wide price fluctuations
the Financial Control approach defined by the GHG Protocol and referenced by the CDP
based on geopolitical factors as well as supply and demand. The availability
maintaining the level of fares requiredIn
to2016,
maintain profitable operations
JetBlue’s gross Scopein 1 Guidance. Ninety-nine percent oftonnesour Scope 18.41%
emissions come from jet fuel combustion, with
new and existing markets and could impede our profitable growth strategy, of emissions
fuel is not onlyincreased
dependent on 581,089
crude oilmetric
but also on refining orcapacity. compared
When evenin the
a small remainder from
amount ofvolume.
the ground
domestic fuel use. Detailed records of jet fuel and ground fuel are
which would harm our business. to the previous year due to an increase passenger * Asorour global oil refining
business capacity
grew, our revenue
maintained,
becomes unavailable, supplykeeping
shortagesthecanrange
result of
foruncertainty
extended periodsin our ofcalculations to less than or equal to 2%.
Furthermore, there have been numerous passenger
mergers and miles increased
acquisitions within 9.3% from
time. The 41.7 billion
availability tois45.6
of fuel billion by
also affected fromdemand2015 forto
home2016, leading to this
heating
the airline industry including the combinations of American Airlines and US oil, gasoline and other petroleum products, as well as crude oil reserves,
associated
Airways, United Airlines and Continental increase
Airlines, and SouthwestinAirlines
JetBlue’sdependence
absolute on Scope 1 GHG emissions. A change hostilities
in physical
SAforeign
SB Disimports
closure ofTRcrude
0201-oil02and
: Despotential
cription of long-teinrm and short-term strategy or plan to
and AirTran Airways. The industry composition
operating may continue to change.
conditions oil producing
also contributed, areas of the world.
as congested Because
airspace in ofthe
theNortheast
effects of these factorsStates
United
manage Scope 1 emissions, emissions reduction targets, and an analysis of performance
against those targets

i IATA— International Air Transport Association JetBlue’s primary sustainability priority — and greatest financial opportunity — is reducing and
ii A4A—Airlines for America managing carbon (CO2) emissions from burning jet fuel in order to reduce fuel costs and protect
14 2015 Annual
JETBLUE AIRWAYS CORPORATIONiii -ICAO— Report
International Civil Aviation Organization JetBlue, the flying public, and the industry from future costs associated with CO2. One way we
seek to protect
iv CORSIA—Carbon Offsetting and Reduction Scheme for International Aviation and grow financial returns is by reducing our greenhouse gas emissions and
*Because of an editing error, the SASB report issued on Aprilpreparing for related
10th, 2017 incorrectly regulatory
stated changes.
the emissions Weasfocus
percent 1.08%.primarily on initiatives that are in our

3
6

A US-based company operating in the Airlines industry.

Jet Blue’s historical sustainability disclosures illustrate how companies often undergo a reporting
journey, where disclosure is developed and refined over time. Earlier Jet Blue reports provide an

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 154

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

abundance of sustainability information but are not presented in an investor-oriented way. More
recent reports reflect a higher degree of investor-focused communications, where qualitative
context offers insight into the company’s management of risks and opportunities, and time series
data communicates performance trends.
As companies evolve their sustainability disclosure process, many employ monitoring
activities to identify opportunities for improvement from one reporting cycle to the next.
Such activities may include monitoring internal and external drivers of risk and opportunity,
monitoring and benchmarking against peers, seeking feedback from investors and other
stakeholders, monitoring mandatory disclosure requirements and practices in other jurisdic-
tions, monitoring standards developments, and seeking internal and external assurance.

Key Takeaways
How a company chooses to report investor-focused sustainability information can impact its useful-
ness and perceived credibility. For investor-focused communication, the way data is presented
directly influences how well analysts and investors can incorporate it into decision-making
processes, and thus can impact a firm’s access to and cost of capital. Companies can bene-
fit from considering investor expectations and preferences for data presentation. A company’s
reporting process over time can also lend insight into how the company’s approach to sustain-
ability (and internal data collection and reporting processes) have matured, and shapes audience
expectations on future performance.
The above disclosure samples represent a final product—the results of intentional (indeed, inten-
sive) internal processes and workflows employed by companies to produce quality disclosure.
Part IV explores in more detail the mechanics behind companies’ preparation of sustainability
disclosure and discusses the range of investors’ use of investor-focused sustainability information.

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 155

FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
11 DIFFERENTIATE how companies disclose sustainability-related financial
information.

? CHECK YOUR UNDERSTANDING

1. What are two reasons why companies disclose investor-focused sustainability information?

2. Where do companies disclose investor-focused sustainability information?

3. H
 ow do companies disclose investor-focused sustainability information when the
Standards do not perfectly align with their business?

4. W
 hat presentation formats have companies embraced when disclosing investor-fo-
cused sustainability information?

JUMP TO ANSWERS

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 156

PART IV
CORPORATE AND
INVESTOR USE: GOING
BEYOND DISCLOSURE

The IFRS Sustainability Disclosure Standards first and foremost

constitute a set of requirements for sustainability-related financial disclo-
sure, however the information infrastructure they provide can serve
as a powerful tool beyond the disclosure process itself. As Standards
first published in June of 2023, application of the IFRS Sustainability
Disclosure Standards is rather young. However, for many compa-
nies, sustainability reporting is an established practice. Indeed, many
have been using the standards and frameworks upon which the IFRS
Sustainability Disclosure Standards were built for many years. By observ-
ing these practices, one can gain insight into the ways companies and
investors use sustainability-related financial information.
Part IV provides:

• a deep dive into the ways investor demand and market forces
shape the use of material sustainability information;

• an exploration of the disclosure process and how companies

incorporate sustainability information into strategic planning and
performance management; and

• an over view of the ways investors integrate sustainability

information into decision-making processes across different asset
classes and securities.
FSA CREDENTIAL LEVEL I STUDY GUIDE PART IV: CORPORATE AND INVESTOR USE: GOING BEYOND DISCLOSURE

A CLOSER LOOK:
INVESTOR DEMAND
FOR SUSTAINABILITY
INFORMATION
13
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:

12 IDENTIFY how investor demand for sustainability information shapes corporate

disclosure and performance management practices.

More and more, investors and the financial services community are adjusting core assump-
tions about modern finance, recognizing that the companies that innovate in the face of changing
markets, effectively manage increasingly constrained natural resources and best manage their
workforce and long-term strategy will survive (indeed, thrive) in the future; while those that do not,
will not.
As discussed in Part I, a growing body of research confirms this thesis, showing a positive
relationship between sustainability, risk reduction and (in many cases) financial returns, and thus
a means to help build stronger, more resilient companies and capital markets. What began as a
niche practice among values-oriented, socially responsible investors that was largely viewed by
the financial community as an effort to create positive impact while sacrificing financial returns,180
is now a mainstream practice where ‘value’ and ‘values’ have a direct (and positive) relationship.181
The use of sustainability information continues to grow as investors express an increased appe-
tite for the potential to achieve similar or better risk-adjusted returns in the long term while also
sustainability-related outcomes. As investors integrate sustainability information into core analysis
and decision-making processes and adopt a longer-term view, companies are challenged to do
the same.182

13.1. A GLOBAL CALL FOR ENHANCED DISCLOSURE

Where companies once rarely received questions from investors about sustainability infor-
mation, investor demand now significantly influences company approaches to sustainability and
disclosure decisions. In fact, research into the perspectives and priorities of senior institutional
investment executives demonstrates that ESG is ‘almost universally top of mind.’183 In a global

180 Robert G. Eccles and Svetlana Klimenko, ‘The Investor Revolution,’ Harvard Business Review: Financial Markets, May–June 2019.
181 Mozaffar Khan, George Serafeim, and Aaron Yoon, ‘Corporate Sustainability: First Evidence of Materiality,’ Accounting Review, 91,
no. 6 (2016).
182 Eccles and Klimenko, ‘The Investor Revolution.’
183 Eccles and Klimenko, ‘The Investor Revolution.’

COPYRIGHT © 2023 IFRS FOUNDATION. ALL RIGHTS RESERVED 158

FSA CREDENTIAL LEVEL I STUDY GUIDE PART IV: CORPORATE AND INVESTOR USE: GOING BEYOND DISCLOSURE

survey by FTSE Russell, more than half of asset owners say their organization is implementing
or evaluating ESG in their investment strategy.184 In addition, a coalition of 631 investors repre-
senting over US$37 trillion AUM voiced their support for the Paris Climate Accord and urged
global governments to enact policy to meet the goals in the agreement, stating that its inves-
tor-government cooperation on climate ‘is vital for our long-term planning and asset allocation.’185
Such statements highlight the crucial relationship between global societal goals and the investor
community, where climate and other policy objectives related to sustainability influence investor
demand for sustainability information. That demand is signaled or directly expressed in a variety
of ways.

13.1.1. GROWING SELL-SIDE AND CREDIT RESEARCH DEMAND

Some of the most visible signs of increasing investor demand for sustainability disclosure can
be attributed to buy-side equity investors and large institutional asset owners. However, investor
demand for sustainability information is increasing across the board, making it critical to consider
sustainability-related risks and opportunities in sell-side research, credit risk analysis, and other
practices representing the diversity of investors in the market and the sources of capital sought
by companies. Sustainability information is being sought by nearly all entities allocating capital.
For example, most major sell-side research firms, including Bank of America, Morgan Stanley,
Goldman Sachs, and Barclays integrate sustainability information in their research.186 In a global
survey of about 200 credit analysts, 83% say that ESG factors are integral to what they do, and
89% say that their firms have an explicit ESG policy in place.187 Regardless of a company’s financ-
ing needs—whether through debt or equity, publicly listed or private—companies can increasingly
expect their sustainability performance to play a role in their access to, and cost of, capital.

13.2. A SHIFT IN MARKET PARADIGMS

To say investors demand sustainability information in the sole pursuit of higher returns is to
acknowledge only the crest of a much broader wave in a shifting market. Increasing demand
for sustainability information is also partly related to the way people invest and a shifting under-
standing of the role investors, particularly institutional asset managers, play in stewarding global
markets.

13.2.1. THE GROWTH OF INDEX FUNDS

Against the backdrop of growing investor interest in sustainability, assets are increasingly
allocated with the goal of tracking the market, rather than the goal of beating the market. Index
funds continue to make up a higher proportion of total market share, as asset managers around
the world move their dollars from active investment strategies (selecting specific assets in attempts
to outperform a benchmark) to index, or ‘passive,’ investment strategies (choosing aggregated

184 FTSE Russell, ‘Smart Beta: 2018 Global Survey Findings from Asset Owners,’ 2018.
185 Global Investor Statement to Governments on Climate Change, 2019
186 David Katz et al., ‘ESG in the Mainstream: Sell-Side Analysts Addressing ESG Concerns,’ Harvard Law School Forum on Corporate
Governance, post based on author’s Wachtell Lipton Memorandum, May 2020.
187 Georgio Baldasarri, ‘ESG Is Becoming Critical for Credit Risk and Portfolio Management Companies,’ S&P Global Market
Intelligence, March 2020. Patrick McCabe, ‘The Shift from Active to Passive Investing: Potential Risks to Financial Stability?,’ Harvard
Law School Forum on Corporate Governance, November 2018.

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assets that replicate a benchmark).188 In fact, in 2019, passive funds, including index funds and
exchange-traded funds (ETFs), surpassed active funds and now make up almost 50% of US equi-
ties.189 Index funds and ETFs are projected to reach a 25% to 28% share of the European equities
market by 2025.190

13.2.1.1. Index funds meet active managers

Index fund owners cannot be as responsive to signals from specific firms as can their active
fund counterparts. Prior to the significant growth in index funds, the dominance of active manage-
ment strategies meant that investors could apply the ‘Wall Street Rule’ and sell shares when
they had lost confidence in management,191 cherry-picking securities based on their preferences
and goals. In the past, asset managers have also generally been more reluctant to vote against
management on ballot items overall, decidedly going with the grain on both management and
shareholder-initiated resolutions.192 Corporate management, as a result, received performance
feedback primarily by observing when and how investors buy or sell their shares.
When invested in an index, the option to cherry-pick goes away. Investors no longer have the
discretion to select individual securities. The investor is bound to the performance of the index
as a whole. Where they gain ease of entry, lower fees and (usually) more reliable performance in
index funds, they lose the option to respond directly to companies by selling their shares. As a
result, they must rely on alternative ways to communicate with the companies in which they are
invested, and they are incentivized to work with companies to meet common performance goals.
In this way, ‘the shift to passive investment strategies can encourage investment stewardship with
a focus on longer-term investment horizons and business strategies.’193

13.2.2. THE GLOBAL STEWARDSHIP MOVEMENT

These two converging trends—the growth of index investing and the rise of sustainability in
investing—mean that asset managers play a more important role in corporate governance than
ever before.194 Beyond the opportunities that sustainability information presents to help reduce
risk and achieve higher returns, the use of sustainability information aligns with investors’ grow-
ing stewardship responsibilities—lending companies insight into the needs and expectations of
investors today.
Stewardship codes were first introduced in 2010 in the UK, formalizing an enhanced expec-
tation of investors’ role in corporate governance. Such codes are based on the logic of fiduciary
duty. They offer a framework of principles that investors can apply to their corporate stewardship
activities. Stewardship codes generally require institutional investors to be transparent about their
investment process, engage with investee companies, and vote in shareholder meetings.195
Stewardship codes and global investor demand for sustainability information are shaping a
new practice that emphasizes the fiduciary responsibility of asset managers to be stewards of

188 Patrick McCabe, ‘The Shift from Active to Passive Investing: Potential Risks to Financial Stability?,’ Harvard Law School Forum on
Corporate Governance, November 2018.
189 John Gittelsohn, ‘End of Era: Passive Equity Funds Surpass Active in Epic Shift,’ Bloomberg Markets, 11 September 2019.
190 Hortense Bioy et al., ‘A Guided Tour of the European ETF Marketplace,’ Morningstar Manager Research EMEA, 2019.
191 Zachary Barker, ‘Socially Accountable Investing: Applying Gartenberg v. Merrill Lynch Asset Management’s Fiduciary Standard to
Socially Responsible Investment Funds,’ Columbia Journal of Law and Social Problems, Vol.53:3. p. 300.
192 Jackie Cook and Jasmine Sethi, ‘The Global Stewardship Movement Draws Passive Investors Into Active Ownership,’ Morningstar,
October 2019.
193 Cook and Sethi, ‘The Global Stewardship Movement Draws Passive Investors Into Active Ownership.’
194 Cook and Sethi, ‘The Global Stewardship Movement Draws Passive Investors Into Active Ownership.’
195 Robeco, ‘Stewardship Code.’

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capital markets, not just stewards of their own

investments. Though grounded in the goal of SUSTAINABILITY: A STEW-
improved corporate governance, stewardship ARDSHIP CODE KEYSTONE
codes naturally promote stronger coordination
among investors and investees in addressing In the 2012 UK Stewardship Code ( the
sustainability-related risks and opportunities. first UK Code to define ‘stewardship’),
In addition to encouraging collaborative ‘stewardship’ was defined as
engagement on shared sustainability-related ‘monitoring and engaging with com-
concerns, stewardship codes often encour- panies on matters such as strategy,
age better disclosure with more standardized performance, risk, capital structure and
metrics to make it easier for investors to under- corporate governance, including culture
stand the sustainability-related risks and and remuneration.’
opportunities relevant to a company.196
The revised 2020 UK Stewardship Code
redefined ‘stewardship’ as
13.2.2.1. Stewardship applied:
shareholder engagement ‘the responsible allocation, management
and oversight of capital to create long-
A shift in voting behavior term value for clients and beneficiaries
Asset managers increasingly expect leading to sustainable benefits for the
strong management and disclosure of economy, the environment and society.’
sustainability matters and hold compa-
nies accountable through a proxy vote. For
example, BlackRock, the world’s largest insti-
tutional asset manager, announced in 2020 that it will ‘hold board members accountable’ where
companies are not producing effective sustainability disclosures or implementing frameworks for
managing sustainability issues. In 2020—before the announcement was made—BlackRock voted
against (or withheld votes for) 5,100 directors, 53 of whom ‘were making insufficient progress inte-
grating climate risk into their business models or disclosures.’197 Notably, some express uncertainty
about BlackRock’s dedication to upholding its 2020 commitment when most proxy voting decisions
are made in 2021. Some point to BlackRock’s past voting record as less aggressive than expect-
ed,198 while others point to the same record to commend a progressive increase in the degree of
independence from voting with a company’s recommendations.199 Assessing this voting record
is complicated by the fact that BlackRock, like other asset managers, is delegated the authority
to vote proxies on behalf of some but not all of its clients; and some asset owners who invest with
BlackRock retain their own voting authority in order to control how their proxies are voted.
Whether BlackRock’s voting decisions—or any other asset manager’s voting decisions—are
aggressive or restrained is subject to debate, but strong statements of support for sustainability
matters is a relatively new phenomenon in capital markets. Well-publicized, strongly worded state-
ments from the largest institutional asset managers represent a highly visible shift in behavior from
fund families engaging with companies on sustainability matters. However, these large players
represent just one signal within broader trends in ESG shareholder proposal and proxy voting.
Widespread investor voting behavior has changed significantly, perhaps revolutionarily, over the
past two decades, with voting surrounding environmental and social issues not only increasing

196 Baker McKenzie, ‘The Stewardship Code 2020: Is This an Opportunity for Listed Companies to Increase Meaningful Stakeholder
Engagement?’ November 2019.
197 BlackRock, Investment Stewardship Annual Report, September 2020.
198 Morningstar Commentary, ‘How Big Fund Families Voted on Climate Change: 2020 Edition,’ 28 September 2020.
199 Alastair Marsh, ‘BlackRock Shows Resolve and Restraint in Public Climate Test,’ Advisor Perspectives, 14 July 2020.

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but also earning record levels of support.

An analysis based on 516,788 votes cast across 1,033 individual environmental and social
(E&S) resolutions by more than 2,000 funds offered within 52 US fund groups found that
asset-manager proxy voting support for ESG-related shareholder resolutions rose from 27% in
2015 to 46% in 2019. As support for E&S proposals reach an all-time high, ‘abstain’ votes also
reached an all-time low, even dropping to 0.3% in 2018. More and more, investors are ‘leaving the
sideline’ to express their opinions on sustainability matters.200
Shareholder resolutions can be time-consuming for investors to draft, propose, and garner
support for, while also demanding time and resources from companies to respond. As a result,
they can draw mixed reactions, perceived either as an essential tool to make shareholders’
voices heard or as a distracting tool wielded by only the most vocal or activist-focused inves-
tors. Moreover, many investors and companies will fall on one end of the voter spectrum with one
shareholder resolution and land on the opposite end of the spectrum with a different resolution.
Regardless of the mixed views on shareholder resolutions broadly, it remains that the dramatic
increase in voting participation rates and support for sustainability-related proxy voting provides
a simple way to track changing views over time.

EXAMPLE: GREEN CENTURY CAPITAL MANAGEMENT AND TYSON FOODS

Green Century Capital Management filed a shareholder resolution with Tyson Foods, one of
the largest global meat processors, calling for the disclosure of an adequate deforestation
policy given the company’s ‘expansion into international markets, including Brazil, China,
and Southeast Asia, which have greater operation and supply chain exposure to deforesta-
tion-related risks.’ In response to the resolution, and after investor negotiations, Tyson pub-
licly committed to ‘reporting on the traceability and sustainability of forest-risk commodities
in its global supply chain’ and ‘to developing and implementing a forest policy that address-
es ‘No Deforestation, No Peat, No Exploitation (NDPE).’ It also agreed to establish supplier
monitoring and engagement policies.’ Satisfied with Tyson’s response to its request, Green
Century withdrew its resolution.
Source: Green Century, ‘Green Century Withdraws Shareholder Proposal with Tyson Foods* After It Commits to
No-Deforestation Policy,’ 5 February 2020.

Meanwhile, withdrawal rates lend a little more insight into how companies and their investors are
working together. Withdrawal rates, or the withdrawal of a resolution because of a negotiated
dialogue, also continue to reach record levels.
In the abovementioned study, 48% of filed environmental and social proposals were with-
drawn, while only 37% of filed proposals went to a vote in 2018. Historically, these numbers have
been reversed. Such a reversal demonstrates an increased willingness of companies and their
investors to work together to find solutions on sustainability matters.201 Notably, today’s environ-
mental and social proposals focus more on disclosure, risk assessment, and oversight than they

200 Jackie Cook and John Hale, ‘2019 ESG Proxy Voting Trends by 50 U.S. Fund Families,’ Morningstar, Inc., 23 March 2020.
201

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do on requesting specific actions or policies.202

ESG: Not just for equity

As many will be quick to point out, equity represents just one source of capital. Indeed, most
companies tend to carry more debt than equity. Investor stewardship thus extends beyond equi-
ties, though it can be challenging for investors to incorporate comparable stewardship practices
into fixed-income and other asset classes.203 For example, as providers of capital without owner-
ship rights, creditors focus their information insights toward detailed risk analysis. Unlike equity,
where sustainability plays a significant role in ongoing stewardship activities, debt investors typi-
cally rely on sustainability information in up-front credit analysis (discussed further in Chapter 14).

13.3. COMPANIES COME TO CALL

With raised investor, creditor, and lender expectations, reporting companies increasingly inte-
grate sustainability into their own engagement with investors (and potential investors) with the goal
of developing a discourse around sustainability disclosure, risk assessment, peer benchmarking
and oversight, and how these issues factor into corporate strategy. Just as standards support
investors in articulating their information needs and informing engagement, so do they support
companies in articulating progress, strategy, goals and outcomes on sustainability topics.

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
12 IDENTIFY how investor demand for sustainability information shapes corporate
disclosure and performance management practices.

? CHECK YOUR UNDERSTANDING

1. What evidence points to increased investor demand for sustainability information?

2. How has the growth of index funds shaped corporate-investor communication?

3. What role does sustainability play in investor stewardship?

JUMP TO ANSWERS

202 Cook and Hale, ‘2019 ESG Proxy Voting Trends by 50 U.S. Fund Families.’.
203 International Corporate Governance Network, ‘What Is the Role of the Creditor in Corporate Governance and Investor Stewardship?,’
2019.

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CONSIDERATIONS
FOR CORPORATE
USE
14
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:

13 RECOGNIZE the cross-functional nature of preparing sustainability disclosures.

14 DISTINGUISH the stages of sustainability disclosure.

15 IDENTIFY the influence of board governance, internal controls and third-party

assurance on the reliability of sustainability information.

16 RECOGNIZE the role of sustainability management in corporate strategy and

risk management.

For preparers, generating and using sustainability information necessitates robust and inte-
grated internal processes. Although all company’s circumstances are unique, the following
considerations are likely to apply to most. While processes developed provide information to
stakeholders, not just shareholders, may align in many cases, the following discussion focuses on
the preparation and use of investor-focused sustainability information.

14.1. B
 USINESS ROLES APPLICABLE TO
SUSTAINABILITY DISCLOSURE
To best understand company-specific sustainability-related risks and opportunities and effec-
tively communicate them to investors, companies often find they need a more diverse set of
internal stakeholders at the table beyond those traditionally represented when developing financial
statements and annual reports.
The list below summarizes the perspectives that certain roles may bring to the identifica-
tion, collection, management and/or disclosure of material sustainability information. As every
company is unique, this is not necessarily a comprehensive or universal list. In many cases, the
roles identified may not be involved to a significant degree, while others not identified—such as
environmental, health and safety professionals—may be integral to the process.

Board of Directors
• Maximize shareholder value and build investor confidence in an organization’s long-term
performance.

• Oversee strategy and risk management, including how sustainability-related risks and
opportunities impact an organization’s business model and value chain.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART IV: CORPORATE AND INVESTOR USE: GOING BEYOND DISCLOSURE

• Provide perspective on the materiality of sustainability information, important metrics, and

how sustainability-related risks and opportunities should be managed.

• Oversee reporting, including assessing adequacy of financial statements and sustainability-

related financial disclosures.

• Provide perspective on how sustainability practices compare with those of direct

competitors and industry peers, as well as provide oversight of the internal audit function
and the external audit process.

CEO and CFO

• Provide perspective on the materiality of sustainability information, important metrics, and
how sustainability-related risks and opportunities should be managed.

• Provide perspective on the ways sustainability-related risks and opportunities impact a

firm’s business model and value chain.

• Certify the accuracy and completeness of internal controls and disclosure controls.

• Provide perspective on how, when and what to communicate to board members,

investors and non-investor stakeholders on business-specific strategies for incorporating
sustainability into core activities, decision-making and performance evaluation.

Legal Counsel
• Provide perspective on the legal risks related to the omission or inclusion of information in
public documents, inform risk management and inform decision-making to fulfill duties of
care.

• Advise on how to adhere to existing and emerging regulatory requirements, as well as the
resources required to comply with external sustainability-related policy.

Chief Sustainability Officer

• Provide perspective on the ways sustainability-related risks and opportunities impact a
firm’s business model and value chain.

• Provide perspective on necessary collaborative relationships, such as those with finance

and internal audit teams.

• Provide oversight and perspectives on how existing processes for collecting, managing
and reporting data can be updated or improved to include sustainability data and where
new data streams should be established.

• Provide perspective on the materiality of sustainability information, important metrics, and

how sustainability-related risks and opportunities should be managed.

• Oversee best practices for disclosure and stay abreast of evolving disclosure requirements.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART IV: CORPORATE AND INVESTOR USE: GOING BEYOND DISCLOSURE

Chief Audit Executive and Internal Audit

• Oversee risk management, controls and governance processes/policies to the board of
directors, audit committee and others.

• Provide perspective on the information needs of independent assurance providers.

• Provide perspective into the level of data control and risk management oversight needed
to inform management about the company’s sustainability performance. Support quality
testing and quality review of controls for sustainability data.

• Provide perspective on alignments between general purpose financial reports to ensure

consistency.

Risk Management
• Provide company-wide perspective on the internal and external risks faced by a firm
and the application of resources to minimize, monitor and control potential impacts that
negatively affect financial position, financial performance and prospects.

Compliance
• Provide perspective on how to comply with existing and emerging regulatory requirements
as well as the resources required to comply with sustainability-related policy.

• Conduct ongoing monitoring of compliance with internal company policies and bylaws and
evaluate possible integrity-related risks faced by a firm.

• Provide perspective on the necessary controls, policies, and procedures companies must
adhere to in order to comply with applicable laws and regulations.

Investor Relations
• Provide perspective on the connections between sustainability and financial performance,
effectively communicate the value of sustainability-related management decisions to
shareholders, and in turn communicate and interpret investors’ opinions to management.

• Engage with investors to understand their sustainability priorities and educate company
leadership on those priorities.

Business Unit Managers

• Provide perspective on unit-specific matters to inform measurement, management and
reporting of sustainability data.

Technology
• Provide perspective on the architecture (technology, platform, software, etc.) that will
support reliable, accurate and complete reporting that meets management’s expectations
for disclosure and/or offers insight to ensure data collection is timely, accurate, complete
and secure.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART IV: CORPORATE AND INVESTOR USE: GOING BEYOND DISCLOSURE

• Provide perspective on how data gathering and reporting processes can be effectively
streamlined and scaled.

Human Resources
• Provide perspective on human capital metrics and how such practices as employee loyalty
and engagement, diversity and inclusion, recruitment and compensation can impact
shareholder value.

Independent Assurance Provider

• Oversee data quality of sustainability-related financial disclosures, including the design
and operation of the internal controls, to establish confidence in the information from
management, investors, and other stakeholders that may use the data.

As standards focused on capturing the effects of sustainability-related risks and opportunities

on companies’ financial position, performance and prospects, the IFRS Sustainability Disclosure
Standards lend themselves well to bridging the conversation between finance and sustainabili-
ty-oriented specialists within companies. Finance and investor relations teams know how to think
about and communicate financial matters to investors, but may not be well versed in sustainability
matters. On the other hand, sustainability professionals without extensive finance and accounting
experience may find it difficult to communicate at the same wavelength as finance and investor
relations teams. As standards designed to enable companies to identify industry-specific sustain-
ability-related risks and opportunities, accompanying metrics and connect that information to
financial performance, the IFRS Sustainability Disclosure Standards offer a common language at
the intersection of both groups.

14.1.1. CROSS-FUNCTIONAL NATURE

Teams involved in the preparation of financial statements are cross-functional. They must
cooperate to accomplish a wide range of tasks such as:

• collect data and analyze a company’s financial performance;

• engage an independent auditor to review the data;

• assess legal requirements and implications concerning disclosure;

• present the statements to the board and management for approval;

• communicate the results to investors, lenders and creditors; and

• use financial statements and market feedback to inform strategy and performance goals.
Identifying, integrating, managing and disclosing material sustainability information similarly
depends on effective cross-functional collaboration. In many cases, companies can rely on the
same or similar policies and procedures established for accomplishing the tasks necessary for
managing and disclosing general purpose financial reports. For instance, existing processes for
measuring and managing data may need to be expanded to include sustainability data. For exam-
ple, a real estate investment trust (REIT) may need to coordinate between internal audit and local

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART IV: CORPORATE AND INVESTOR USE: GOING BEYOND DISCLOSURE

property managers to communicate energy and water data. A software company’s sustainability
committee may need to include representatives from HR and investor relations to communicate to
investors the outcomes of diversity and inclusion practices in recruitment.
The disclosure of material sustainability information is not a matter of starting from scratch.
Rather, it is about collaborating across business functions and integrating information. Companies
may benefit from applying lessons from their existing reporting functions to enhance sustainability
data collection, performance management and internal communication. Indeed the disclosure
process can enhance a company’s understanding of the ways sustainability matters affect busi-
ness outcomes.204 Indeed, collaborative companies often adapt faster, innovate more, and engage
more completely with the marketplace to understand and respond to customer needs and compet-
itive pressures.205

14.1.2. ALIGNING ON THE ‘WHY’

As seats at the proverbial disclosure table are filled by a more diverse range of internal
stakeholders, each bringing vital perspective and expertise, companies can benefit from estab-
lishing purpose-based alignment. More than just a box-ticking or compliance exercise, why is the
company is choosing to focus on sustainability information and what does it wants to achieve as
a result? A company’s approach can be motivated by a wide range of factors and stakeholders,
not all of which focus on financial outcomes and investor communication.

14.1.2.1. Taking ownership of your sustainability story

The growth of third party ESG data providers reflect demand sustainability information.
According to MIT Sloan School of Management, ‘The portion of assets invested that rely in some
way on ESG ratings has increased 34% since 2016.’ As companies and investors alike seek to
account for sustainability-related risks and opportunities, ESG ratings and analytics providers
enable peer-to-peer comparison and spur competition based on sustainability performance.
However, ESG ratings and analytics can also create challenges for companies. Each takes a
unique approach to sourcing data and calculating performance, meaning providers often define
sustainability-related risks and opportunities differently and apply different modes of weighting and
measurement to rating and ranking processes. Where companies do not disclose sustainability
data, third-party aggregators and raters may calculate performance and tell companies’ story on
their behalf. Corporate disclosure often must serve both the purpose of telling the company’s value
creation story and providing data inputs to aggregators and raters.
However, the range of rating and ranking methodologies means the information deci-
sion-makers receive can be noisy. Where investors are not able to objectively assess company
performance, stock and bond prices are unlikely to reflect companies’ management of relevant
sustainability-related risks and opportunities. Likewise, companies may receive mixed signals
about what actions are expected of them, and which will be valued by the market.206
As mentioned in Chapter 5, standardized disclosure can improve the data inputs used by third
parties. Though no company can completely control the way their data is used downstream, they

204 Pamela J. Craig, Bruno Berthon, Steven Culp, and Donniel Schulman, ‘The Chief Executive Officer’s Perspective,’ Accenture, p. 8.
205 Robert G . Eccles, Beiting Chang, Daniela Saltzman, eds ., Integrated Reporting and the Collaborative Community: Creating Trust
Through the Collective Conversation (Cambridge, MA: Harvard Business School, 2010), p . 186.
206 Traci Mayor, ‘Why ESG Ratings Vary So Widely (and What You Can Do About It),’ MIT Sloan School of Management, August 2019.

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may be motivated to disclose in order to clearly tell their own value creation story, and to counter-
balance or reinforce the story told by third parties.

14.1.2.2. Peer effects

Companies can be, and often are, influenced by the disclosure behavior and performance of
industry peers. As greater and more robust sustainability information makes it easier to compare
companies and profile peer performance, companies can face increased pressure to be among
the top performers in their industry. They can also be influenced by the reporting behavior of
peers more generally—where the type and quality of sustainability disclosure reported by others
influences how and what other companies choose to disclose.
It is important to note, however, that peer influence on reporting behavior can be a double-
edged sword. It is not just a race to the top. Where some industries may have very advanced,
robust sustainability disclosure practices, others may not, dampening motivation to disclose if
peers have not started reporting. In jurisdictions where disclosure is voluntary, some companies
may be hesitant to take on the risk that may come with being a first mover when there may be
greater benefit to being a fast follower. Peer effects can accelerate both disclosure and perfor-
mance management when peers issue sustainability disclosures but can similarly delay or stifle
those practices if no peers or only a few have started doing so.

14.1.2.3. Improving access to capital

As discussed in Chapter 13, public investor signals for sustainability disclosure and broader
momentum of investor interest can significantly influence a company’s decision to disclose. As
investor demand for consistent, comparable and reliable sustainability information increases,
reporting companies are orienting their sustainability information to meet investor audiences, moti-
vated by investor inquiries and public signals from the investment community.
This evolution in company disclosure follows long-standing practices of adapting outbound
information to attract investors. For example, North American companies seeking to gain EU-based
investors may voluntarily adapt their reporting to meet EU requirements. Similarly, companies in
emerging markets may adapt their disclosures to meet the expectations of international investors.
The common language provided by international sustainability disclosure standards can help
reduce barriers to attracting international capital.

14.1.2.4. Improving performance management

The decision to use certain sustainability disclosure standards can also be grounded in the
view that sustainability information helps generate a more complete picture of the risks and oppor-
tunities facing a company—illuminating new risks and opportunities or enhancing insight into those
already known and managed. High-profile controversies have spotlighted the potential reputa-
tional harm of ignoring (or failing to recognize) sustainability-related risks and the related financial
impacts. Robust research demonstrates that companies focusing on sustainability matters can
reduce costs, improve worker productivity and engagement, mitigate risk potential and create
revenue-generating opportunities (among other means of enhancing performance).207

207 Corinne B. Bendersrky, Beth Burks, and Michael Ferguson, ‘Exploring Links to Corporate Financial Performance,’ S&P Global, 8 April
2019.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART IV: CORPORATE AND INVESTOR USE: GOING BEYOND DISCLOSURE

Companies may collect, manage and report sustainability information for diverse reasons
that extend beyond the four mentioned above, and they may also identify with multiple objectives.
Regardless of the ‘why,’ companies that define and align on their purpose for disclosure tend to
more effectively focus resources and achieve desired outcomes. Still, many companies explain
that disclosure can be the ‘tip of the spear’ that accelerates attention and effort toward managing
sustainability-related risks and opportunities.

14.2. PREPARING FOR DISCLOSURE

Companies at the beginning of the reporting cycle or those preparing sustainability-related
financial disclosure for the first time can benefit from:

• understanding its value chain;

• understanding its reporting environment;

• creating organizational buy-in; and

• evaluating its audience.

14.2.1. UNDERSTANDING THE VALUE CHAIN

As mentioned in Section 9.2., to create and deliver products and services, all companies rely
on its value chain. The IFRS Sustainability Disclosure Standards define the ‘value chain’ as:
The full range of interactions, resources and relationships related to a reporting
entity’s business model and the external environment in which it operates.
A value chain encompasses the interactions, resources and relationships an
entity uses and depends on to create its products or services from conception
to delivery, consumption and end-of-life, including interactions, resources and
relationships in the entity’s operations, such as human resources; those along its
supply, marketing and distribution channels, such as materials and service sourc-
ing, and product and service sale and delivery; and the financing, geographical,
geopolitical and regulatory environments in which the entity operates.208
To gain a comprehensive understanding of the sustainability-related risks and opportunities
that are reasonably likely to affect a company and gain insight into how to best communicate and
manage them, companies benefit from analyzing, and perhaps even visualizing, the scope of their
value chain. Doing so enables companies to identify where certain sustainability-related risks and
opportunities affect the company (procurement, operations, infrastructure, after-sales service or
somewhere else?) which in turn can help inform where to focus resources most effectively. Value
chain scoping also enables companies to identify where high-quality external data is available
and/or reasonable to obtain. By reevaluating its value chain over time, companies can also gain
insight into important shifts that affect the focus of its disclosures and strategic decisions.

14.2.2. UNDERSTANDING THE REPORTING ENVIRONMENT

No company operates in complete isolation. In the early stages of the sustainability disclosure

208 IFRS S1, Appendix A, Defined terms, June 2023.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART IV: CORPORATE AND INVESTOR USE: GOING BEYOND DISCLOSURE

process, companies can benefit from observ-

ing their peers and reviewing broader market
Questions to consider
trends such as investor statements, regulatory Which disclosure topics and metrics are
developments and the adoption of voluntary frequently included in peer reporting to
standards and frameworks. An understanding investors?
of the surrounding reporting environment can
help shape company decisions about how, Is information reported at the aggregate
when and where to disclose—whether report- level for the company, or by region or
ing for the first time or the fiftieth. business segment?
For new and veteran preparers, the How are peers presenting data
process of analyzing reporting trends and on sustainability-related risks and
industry peers can help a company determine opportunities?
how to disclose, where to disclose, and what
to disclose (what metrics are being bench- Do peers provide activity metrics that
marked and analyzed). With industry practice enable normalization and comparison?
as a key informant, companies can evaluate
alignment with disclosure requirements. Beyond informing the scope and content of disclosure,
peer comparison can help a company assess its own performance and set targets based on the
progress and performance of competing firms.
In addition to keeping an eye on what industry peers are reporting, companies can benefit
from continually reviewing their surrounding market for evolving stakeholder pressures, regulatory
developments and industry disruptions. Surrounding market trends can help elucidate emerging
sustainability-related risks and opportunities. For example, as certain geographies experience
increased incidences of extreme weather, it may become important for investors to know how real
estate firms mitigate risks associated with the physical impacts of climate change across their
portfolio.

XBRL: A digital reporting standard

In a digitized world, reporting comparable, consistent and reliable sustainability data with
efficiency relies on a globally consistent system of data tagging or a ‘digital taxonomy’.

XBRL (eXtensible Business Reporting Language) provides a standardized system to

improve the way data is communicated in the capital markets. It enables preparers
of financial reports to tag items in their reports to the specific elements of the XBRL
taxonomy, which in turn enables users to compare the data in a standardized way across
software and platforms. Where users of reported data previously needed to reconcile data
from multiple platforms through manual integration, XBRL makes it easy to automatically
centralize data from various sources.

In many jurisdictions, the use of XBRL is a regulatory mandate. To reduce the burden on
reporting companies, regulators will mostly likely include sustainability disclosure as part
of the existing taxonomy.
Source: XBRL, ‘ESG,’ Business Reporting Standard, accessed October 2020.

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14.2.3. CREATING ORGANIZATIONAL BUY-IN

Integrating material sustainability information may be more likely to succeed when a company
views the use of the information as aligned with its strategic objectives. While successful disclo-
sure needs effective collaboration across business units and hierarchies, company leadership
plays an integral role in setting the tone from the top.
Senior leaders who prioritize sustainability and transparency can accelerate the integration
of sustainability-related financial disclosure. Leadership can facilitate organizational buy-in by
showing support for embedding sustainability-related risks and opportunities into the company’s
strategy, business model and company culture. This includes integrating sustainability information
in core company functions such as governance, strategy and risk management. Strong leader-
ship can also help ensure that the necessary resources are made available to implement the
processes required of quality disclosure. Notably, management and board confidence in mate-
riality judgements can be instrumental in supporting internal resource allocation to managing
sustainability-related risks and opportunities.
To effectively integrate sustainability into various roles and business units, and ultimately
produce quality disclosures, a company’s brand identity and associated culture can play an
important, if not determining, role. Culture is not just the result of influence by a singular person
or small group of leaders at the top. Rather, it is shaped and upheld by the collective behavior of
each individual. If transparency is a core component of a company’s culture, for example, it may
be easier for the organization to communicate cross-functionally and hierarchically. If a company
identifies with being a ‘risk avoider,’ it may be easier to integrate sustainability matters into risk
management and compliance functions than into strategic growth plans.
Ultimately, creating buy-in across an organization can be a function of individual leadership
from the top or an alignment with the brand or internal culture—or, not uncommonly, a combina-
tion of the two.

14.2.4. EVALUATING AUDIENCE NEEDS

Corporate disclosure, like any form of communication, is most effective when tailored to its
primary users. Indeed, the IFRS Sustainability Disclosure Standards support investor-focused
communication. However, investors are not a monolith. As discussed in Chapter 3, the common
information needs of investors are not the same for every company. It is also true that compa-
nies often have other important stakeholders that use sustainability information. By evaluating the
needs of its audiences, preparers can more effectively meet the information needs of investors
and identify where its sustainability-related financial disclosures may also meet the information
needs of other stakeholders.
Investor engagement and monitoring can provide key information for improving disclosure
efficacy. For example, a company may wish to solicit investors’ view of certain risks and opportu-
nities or the metrics most useful to investor decision-making. Monitoring investor policy statements,
proxy voting guidelines or other opinions related to sustainability expressed publicly can also lend
insight into shifting shareholder expectations. Shareholder engagement and monitoring can be
particularly informative to companies just beginning their sustainability disclosure journey but can
be equally useful on an ongoing basis as disclosure expectations mature and evolve over time.

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14.3. PREPARING QUALITY DATA

Consistent, comparable and reliable data is the key to effective performance management and
disclosure, forming the information backbone for companies and well-functioning capital markets.

14.3.1. ESTABLISHING DATA NEEDS AND PERFORMING A GAP ANALYSIS

Once a company establishes a clear audience and identifies its information needs, it must
identify which data to collect and how to collect it. As discussed in Chapter 7, this requires compa-
nies to identify material information about the sustainability-related risks and opportunities that
could reasonably affect its prospects.
Performing a gap analysis may be a practical initial step in determining what data is already
reported externally, what data is being collected but not reported externally, and what information
still needs to be collected. For information already reported, a company may also benefit from
assessing the quality of existing data collection procedures. For instance, as part of its gap anal-
ysis, a company may choose to do the following:

• Assess if and how it currently reports financial and sustainability information in existing
disclosure to investors, regulators or other stakeholders. This will help the company identify
which disclosure obligations are already being met. Those that have already prepared
disclosures using the SASB Standards and/or TCFD Recommendations will likely find
that it is well on its way to meeting the requirements of the IFRS Sustainability Disclosure
Standards, and that existing functions, relationships and processes to prepare data are
already in place.

• Evaluate if and how it currently collects information relevant to each sustainability-related

risk and opportunity, including internal management reporting. This will help the company
identify existing data that, while not currently reported externally, may nevertheless support
its external reporting objectives. Additionally, this process will help the company identify
the internal subject matter experts who can best assess what may be needed to ensure
data are aligned with disclosure requirements and objectives.
In performing this analysis, a company is likely to identify three categories of metrics:
1. Those for which it is already collecting data aligned with disclosure objectives: In this case,
a company may assess how strong internal controls are for the data, who is accountable
for data accuracy, whether data is subject to oversight by a disclosure or board committee
and whether it has been assured by a third party.
2. Those for which it is collecting similar data: In this case, a company should work with
internal subject matter experts or business units, business partners and/or trusted advisors
to evaluate whether the data needs to be changed to meet reporting objectives.
3. Those for which it is collecting no data: In this case, the company should seek to
understand the level of effort required to capture and disclose the necessary data. For
each sustainability-related risk, opportunity and associated metric identified, the company
should work with its cross-functional team to explore which internal experts would be best
equipped to gather the data, and what the associated level of time, effort and cost might
be.

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14.3.2. THE PILLARS OF RELIABLE INFORMATION

As discussed in Section 9.5.1.2., for the usefulness of sustainability information to be
enhanced, it must be verifiable. Verifiable data signals to investors that the information is reliable
and can be trusted to be complete, neutral and accurate. Sustainability information that lacks reli-
ability greatly inhibits corporate and investor use. Where information is unreliable,

• corporate management will not be as comfortable making decisions based on the

information; and

• investors and analysts will be less likely to include sustainability information in financial
analysis.
To produce verifiable and reliable sustainability disclosures, companies often rely on three
pillars of reliable information:
1. Appropriate board oversight helps ensure the accuracy of sustainability data by
instituting appropriate internal controls and assurance and audit committee oversight;
2. Established internal controls ensure the accuracy of sustainability data, from collection
to preparation to disclosure; and
3. Data assurance provides external stakeholders, company management, and the board
with confidence in the validity of disclosed information.
Sustainability information has often been captured without the benefit of the governance,
processes and controls typically applied to the financial information companies disclose to inves-
tors. Today, many of the questions that arise around the reliability of sustainability disclosures are
the very same questions that made financial auditing an obligatory practice in the wake of the
Great Depression, triggered by the stock market in 1929. Is the underlying data accurate? Is the
underlying data complete? Are controls in place to mitigate risks and improve reliability in the data
collection processes?

14.3.2.1. Board oversight and the audit committee

Board governance represents the first pillar of reliable information. The process of gaining
board and/or audit committee approval prior to disclosure is best practice. As shareholder
representatives, board members have a responsibility to oversee disclosures to investors to gain
comfort with the expected accuracy and reliability of the disclosure process. Accordingly, prepar-
ers can benefit from implementing a system of governance for the development and disclosure
of sustainability information—including management involvement, board oversight and internal
control—that matches the integrity of systems used for financial reporting.
The expanded role of the board and audit committee raises the question: why is sustainabil-
ity now a board-level risk? For investors, strong and transparent board oversight is essential to
assess the trustworthiness of a company. Sound governance of sustainability matters—particu-
larly those relevant to assessing risks, competitive position and surrounding market trends—must
be communicated to ensure they meet the needs of investors and, in many cases, non-investor
stakeholders as well.209
Audit committee involvement in the oversight and review of sustainability-related metrics can

209 Deloitte, ‘Sustainability and the board: What do directors need to know in 2018?’ Global Center for Corporate Governance, 2018.

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help ensure that information is prepared with the appropriate level of scrutiny.210 As the entity with
the responsibility and expertise needed to oversee internal controls for general purpose financial
reporting, including sustainability-related financial disclosure, audit committees play an important
role. The audit committee represents the ‘front line’ in determining if and how sustainability infor-
mation will be assured.211

14.3.2.2. Internal controls

As the second pillar of reliable information, internal controls are generally defined as
activities that help companies achieve their objectives by mitigating risks of incorrect data and
disclosures. When effectively implemented and maintained, they provide confidence that the orga-
nization has achieved its operations, reporting and compliance objectives.212 Examples of internal
control activities include:

• calibration testing of measurement equipment (e.g., electricity meters);

• establishing automated tolerance limits that trigger warnings when anomalies occur;

• protecting data access (e.g., minimizing possible data corruption);

• reconciling invoices to the general ledger;

• performing analytical reviews to follow up on unusual fluctuations, adjustments and the

like; and

• establishing independent reviews during the data entry process.

Internal controls are often closely associated with disclosure preparation for regulatory filings
and external assurance. Before a public corporation files its financial statements, it is typically
required to certify the statements and have them assured by an independent auditor—both steps
that confirm the validity of disclosed information. Establishing internal controls for sustainability
information supports sustainability disclosures in meeting the same standard of accuracy.
Even outside of regulatory filings, internal controls, and a company’s certification of those
controls, can signal a higher standard of accountability for sustainability disclosures than typi-
cally exist in other communication channels, such as a sustainability or CSR report. Regardless
of where companies report, many companies find they can benefit from integrating sustainability
information into existing internal systems and processes. Indeed, internal controls have value
beyond compliance and assurance. Effective internal controls can help organizations grow on a
sustained basis, with confidence and integrity in all types of information.213 Designing for effective
use of internal controls even before the collection of new begins can be the most efficient way to
implement them.

210 Loop and DeSmith, ‘Sustainability/ESG reporting—Why audit committees need to pay attention,’ PricewaterhouseCoopers, 2020.
211 Deloitte, ‘On the board’s agenda. The strategic audit committee: a 2020 preview,’ Center for Board Effectiveness, January 2020.
212 Committee of Sponsoring Organizations of the Treadway Commission, ‘Internal Control—Integrated Framework,’ Executive Summary,
May 2013
213 Robert H. Herz. Brad J. Monterio, and Jeffrey C Thomson, ‘Leveraging the COSO Internal Control: Integrated Framework to Improve
Confidence in Sustainability Performance Data,’ September 2017.

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Resource: Committee of Sponsoring Organizations of the Treadway

Commission (COSO) Internal Control–Integrated Framework Principles:

COSO—a private-sector initiative to provide frameworks and guidance on enterprise risk

management, internal control, and fraud deterrence—developed a framework to help
companies integrate sustainability reporting objectives into their existing internal control
framework. As stated in Leveraging the COSO Internal Control–Integrated Framework to
Improve Confidence in Sustainability Performance Data: ‘Applying the same systematic
rigor to measuring, validating, managing, and reporting material sustainability information
that is typically applied to financial reporting should lead to greater corporate and investor/
stakeholder confidence, organizational value, and capital markets’ effectiveness.’

By applying the COSO framework to sustainability information, a company can implement

internal controls that mirror the rigor and robustness of regulatory internal-controls require-
ments.

14.3.2.3. Data assurance

‘Assurance’ is defined as a review by external, independent professional(s) on the credibility
of data—a process whereby an independent third-party provider applies established assurance
procedures in order to report an opinion on the reliability and validity of a company’s disclosures.
The opinion helps the user of the information judge its reliability. Audits are likely the most well-
known assurance service among public corporations and the investment community. They involve
the examination of both financial statements and internal controls by independent certified public
accountants (CPAs).
Assurance is not limited to external financial statements. Assurance engagements can also
involve non-financial data and related processes and controls, as long as the assurance provider
can use a sound methodology to assess credibility. As defined by the American Institute of
Certified Public Accountants, ‘examinations are audit-level engagements designed to provide a
high level of assurance on information other than historical financial statements.’214
While assurance engagements often involve publishing an external opinion related to the
accuracy of general purpose financial disclosures and the effectiveness of a company’s process
and controls, companies can also use assurance to provide perspective on the effectiveness of
its internal controls, internal audit, or other procedures for internal use when assessing assurance
readiness. Through internal controls, internal audit, agreed-upon procedures engagements and
other measures, a company can also establish a reasonable level of confidence in the quality of
information used for internal decision-making. Assurance signals to markets that the information is
reliable, but the assurance process can also have internal benefits. Management can benefit from
the feedback and advice that comes with having an independent perspective on their sustainabil-
ity disclosures and associated processes.
Assurance engagements can be conducted at a comparable level of rigor as an audit or
at a less rigorous level. These differences result in different assurance testing procedures and

214 ACIPA, CPA Services, 2015.

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opinions. The most rigorous assurance engagements, on par with audits, examine the reported
information, the source data, and the organization’s internal controls for protecting the integrity
of the source data. Internal controls are reviewed to gauge how effectively they mitigate the risk
of misstated data. This level of rigor is called reasonable assurance. A less rigorous assurance
engagement—limited assurance, or a review—is more limited in scope, which can be associ-
ated with a lower degree of confidence that the reported information is reliable. The quality and
trustworthiness of the assurance depends on the professional expertise of the person or people
performing the service, their independence from the reviewed organization, and their adherence
to professional standards.215 Aligning early on assurance goals can inform the needed level of
board oversight and internal controls.
The IFRS Sustainability Disclosure Standards, including the SASB Standards, are designed
to support independent third-party assurance. Specifically, should a company elect to engage
an assurance partner, the metrics and underlying technical protocols are designed to constitute
the basis for suitable and available criteria in such an engagement. Indeed, as more regulators
mandate sustainability disclosure, the level and quality of sustainability-related assurance services
is likely to rise.

14.3.3. SPECIAL DISCLOSURE SITUATIONS

The structural complexities that require companies to use cross-functional teams when prepar-
ing disclosures may also present challenges related to the scale and scope of a company’s
operations. The IFRS Sustainability Disclosure Standards’ Industry-based Guidance and the SASB
Standards utilize the Sustainable Industry Classification System (SICS) (see Section 10.3.1.1.3.).
When a company reporting using the IFRS Sustainability Disclosure Standards is integrated hori-
zontally across industries or vertically through the value chain, it may need to rely on guidance
for more than one industry.

14.3.3.1. Reporting across multiple industries

Using SICS, companies can identify their primary industry as well as additional industries that
reflect their operations.
If a company’s consolidated operations span multiple industries, a company may consider the
relevance of sustainability-related risks and opportunities and metrics beyond those defined for
its primary industry. To support accurate disclosure, consolidated entities may calculate metrics
for the whole entity, regardless of the size of the minority interest, but data from unconsolidated
entities may not necessarily need to be included. Data for unconsolidated entities is relevant to
investors when it is necessary to understand the effect of sustainability topics on the company’s
ability to generate cash flows.
If a company has a unique business model that does not fit neatly into traditional industry clas-
sifications, it may wish to consider sustainability-related risks and opportunities (and associated
metrics) from an array of industries that have similar activities, choosing those disclosure topics
that support the communication of material information to investors.

215 AT-C 105.06.

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14.4. REPORTING MATERIAL SUSTAINABILITY DATA

14.4.1. THE ROLE OF THE DISCLOSURE COMMITTEE
Most companies filing an annual report
rely on a formal disclosure committee to help The controller’s questionnaire
review disclosure controls, internal controls
and the accuracy and completeness of the Financial disclosure involves a control-
disclosure statements that are subject to certi- ler’s questionnaire to gain additional in-
fication. Some companies may opt to create formation needed to support the accurate
a comparable committee for the disclosure presentation of financial statements. The
of sustainability information. However, such controller’s questionnaire can be instru-
practice is not widespread. For instance, in mental in gathering information needed
a sample of 56 companies across 12 juris- to assess the likelihood and magnitude
dictions, 22 companies adopted board of specific topics in future periods, thus
committees for CSR and ESG —the least helping companies assess the materi-
common committee type among risk, audit, ality of information over time. The same
renumeration and nomination. 216 To bring practice can be useful when applied to
the appropriate perspectives together and sustainability information.
maintain the integrity of vital internal controls,
a company may choose to fully integrate
sustainability reporting functions into existing disclosure committee structures, create ESG
subcommittees, create a stand-alone sustainability committee or come up with some hybrid that
best suits the company’s structure.

14.4.2. REPORTING PERIOD AND TIMELINE

Among companies that publish sustainability reports separately from its general purpose
financial reports, it has been common for annual financial reporting and sustainability reporting
timelines to vary widely. For non-investor audiences, discrepancies between reporting timeline and
the periods reflected in the data typically pose no issue. However, for those seeking to evaluate
a company’s sustainability-related financial information, which is connected to its financial state-
ments, it is important that companies provide its sustainability disclosure at the same time as its
financial statements. For most, this means preparing and publishing sustainability disclosures for
a 12-month period according to the fiscal calendar. Variations in companies’ reporting timelines
can occur based on specific circumstances and regulatory requirements.

14.4.3. ONGOING MATERIALITY ASSESSMENT

Companies consider and reconsider the materiality of information throughout the reporting
process, typically on a quarterly basis. It often makes sense for companies to consider the mate-
riality of sustainability information within the financial reporting disclosure processes that occur
on a regular basis to help achieve connectivity and alignment. For example:

• The cross-functional team may identify specific research and/or analysis that will better
inform future evaluation of the nature, likelihood and magnitude of the effects of certain

216 WBCSD, ‘The State of Corporate Governance in the Era of Sustainability Risks and Opportunities,’ 2019.

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sustainability-related risks or opportunities.

• The company may wish to engage directly with investors and/or shareholders to seek their
input on sustainability disclosures.

14.4.4. TELLING YOUR VALUE CREATION STORY

14.4.4.1. The importance of context

The most important aspects of a sustainability-related risks and opportunities cannot always
be completely captured by numbers. As sustainability information plays an increasingly important
role in corporate management and investor decision-making, companies can develop narrative
information to help inform decisions when quantitative metrics do not provide full information on a
company’s management of the matter. After all, investors’ growing appetite for sustainability infor-
mation is not driven by data for its own sake but for how that data can shed light on a company’s
financial position, financial performance and prospects.
For example, Air Products, a Chemicals industry company, disclosed using the SASB
Standards and provided the associated workforce health and safety metrics in its 2020
Sustainability Report. Specifically, it published the annual total recordable incident rate (TRIR)
for employees and contractors, as well as an annual fatality rate for employees and contractors.
These quantitative metrics are supplemented by a discussion and analysis of the ‘efforts to assess,
monitor, and reduce exposure of employees and contract workers to long-term (chronic) health
risks,’ as well as references to three pages of the report body. Within these pages, Air Products
provides guidance on its annual performance, sets future goals (and describes past progress),
and details how it will meet those goals through safety and health management commitments. On
their own, TRIR and fatality rates can offer a sense of the company’s performance compared to
that of its industry peers. With surrounding discussion and analysis, however, report users gain a
complete understanding of the company’s progress overtime, how management contextualizes
its current performance and its future goals and plans for meeting them.
For each metric disclosed, relevant contextual information can help ensure primary users gain
an accurate picture of the company. This information can include (but is not limited to):

• governance, strategy and risk management;

• activity metrics to facilitate normalization of reported metrics;

• targets; and/or

• discussion of uncertainty and estimates.

Existing financial narrative directives

Qualitative information is already an integral part of financial reporting. The IFRS Accounting
Standards and US GAAP have established explicit expectations that financial information be
accompanied by supporting context.
For example, the IFRS Management Commentary Framework was developed to:
…provide users of financial statements (existing and potential investors, lenders, and
other creditors) with integrated information providing context for the related financial

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statements, including the entity’s resources and the claims against the entity and its
resources, and the transactions and other events that change them.
It is meant to provide management’s view of the entity’s ‘performance, position, and progress
(including forward looking information)’ and ‘complement information presented in financial state-
ments.’217 For companies registered with the US SEC, Item 303 of Regulation S-K similarly requires
a company to provide a discussion and analysis of management’s view of the business (known
as the MD&A). The MD&A requires registrants to provide investors and other users with material
information that is necessary to form an understanding of the company’s financial condition and
operating performance, as well as its prospects for the future. 218 In other words, the narrative
requirements of the IFRS Sustainability Disclosure Standards are nothing new.

14.4.5. ASSURING SUSTAINABILITY INFORMATION

The rise in sustainability disclosure and investors’ increased consideration of sustainability
data have prompted a corresponding focus on assurance. While nearly all investors believe that
sustainability disclosures should be subject to independent, third-party assurance at some level,219
historically a minority of sustainability disclosures have been assured,220 though some progress
has been made in recent years. For instance, a 2022 KPMG Survey of Sustainability Reporting
found that 47% of N100 and 63% of G250 companies gain external assurance for sustainability
disclosures, up from 38% and 59% in 2013 respectively.221 However, those that do gain assurance
for their disclosures often pursue the more limited option—a review—which typically encompasses
only one data point or a handful of data points rather than all the data presented in the report.
The IFRS Sustainability Disclosure Standards are designed to make reported information
assurable, but it is up to jurisdictional regulators to determine what level of assurance for sustain-
ability disclosures is required. Independent assurance of sustainability disclosure is currently
required in a handful of jurisdictions (e.g., South Africa and the EU). Indeed, as more jurisdictions
move to mandatory sustainability disclosure, rates of assurance are likely to increase. Still, even
in the absence of hard requirements more and more companies voluntarily elect to gain external
assurance for their sustainability disclosures to signal to investors that the information is reliable
and trustworthy. For example, 82% of the members of the World Business Council for Sustainable
Development received external assurance on their ESG reporting,222 and 67% of investors believe
ESG reports should undergo full audit, similar to financial audit 223 —another indication that future
assurance levels for sustainability information will increase.
Still, consumers of sustainability data do well to recognize that the scope of assurance for
sustainability information can vary considerably from company to company—some assurance
engagements only cover specific metrics while others may cover the content of entire reports.
Interestingly, research conducted by Si2 found that, of sustainability reports that include an assur-
ance statement, about 90% of external assurance pertains to only a selection of reported data, in

217 Deloitte, ‘Summary of IFRS Practice Statement Management Commentary,’ n.d.

218 SEC FR-72, Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of
Operations (December 2003).
219 McKinsey & Company, ‘More Than Values: The Value-Based Sustainability Reporting That Investors Want,’ 7 August 2019.
220 CFA Institute, ‘Environmental, Social, and Governance (ESG) Survey,’ 2017.
221 KPMG International, ‘KPMG Survey of Sustainability Reporting 2022,’ p.34, September 2022
222 WBCSD, Reporting Matters 2019.
223 McKinsey Sustainability Reporting Survey.

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most cases GHG emissions.224

14.4.5.1. A growing body of assurance guidance

As more companies seek to assure sustainability information, a number of international and
jurisdictional institutions have published guidance to support companies in preparing sustain-
ability information to be assured, and to support assurance providers in applying the requisite
processes and standards to a growing volume of sustainability disclosures. The table below lists
some of these resources.
Table 6—Sample of assurance guidance resources

Alongside internal controls and board governance, assurance helps improve the reliability of
reported sustainability information. Market participants require accurate and credible information
to make confident and informed decisions. Where sustainability information enhances the
completeness and decision-usefulness of general purpose financial reports, external assurance
can add an element of much-needed validity to meet the needs of primary users and the company

224 Si2 and the Investor Responsibility Research Institute, ‘State of Integrated and Sustainability Reporting 2018,’ 3 December 2018.

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itself. While assurance engagements offer value to any company seeking to enhance the credibility
of its disclosures, the type and level of assurance should reflect the needs of the company’s
unique investors.

14.5. MANAGING SUSTAINABILITY PERFORMANCE

As mentioned, sustainability disclosure for many companies can be the tip of the spear—the
factor that initiates processes of collecting and using material sustainability information. Even
if a company did not intend to publicly disclose, the processes of data collection and analysis
triggered by disclosure can be incredibly useful to performance management and strategic deci-
sion-making. As an understanding of the link between sustainability and financial performance
becomes more sophisticated, companies can progress from minimizing risks and short-term costs
to maximizing long-term value creation and the development of competitive advantage.

14.5.1. CREATING A SUSTAINABLE BUSINESS STRATEGY

It can be useful to think about a company’s ability to drive value through sustainability as the
difference between a ‘sustainability strategy’ and a ‘sustainable business strategy.’
A sustainability strategy is a company’s approach for improving its performance on one or
more sustainability topics. They represent tactical, focused responses to a specific performance
area. A sustainability strategy—and any goals that may be communicated to the public—often
reflects popular topics in the media or society at large (e.g., reducing building energy use by
20% by a specific year, serving 80% locally sourced food in staff cafeterias, or auditing an entire
supply chain for adherence to a ‘no child labor’ policy within three years). Consequently, sustain-
ability strategies can be one way a company responds to requests from stakeholders or chooses
to improve its brand. However, by virtue of their focus on a specific element of the business,
sustainability strategies are often independent of the company’s core business strategy and do
not necessarily translate into sustained long-term financial success.
A sustainable business strategy, on the other hand, is a company’s plan to proactively
improve its financial performance by managing the risks and opportunities that impact its ability
to create value. Just as investors need financial information (both monetary and non-monetary) to
make informed decisions, business managers must consider both types of information to create a
sustainable business strategy. In both cases, it is necessary to have useful information about the
sustainability-related risks and opportunities that that affect the company’s profitability and cash flows.
While the process for every company is unique, the steps for developing a sustainable busi-
ness strategy can generally be defined as:
1. Identify the proper metrics associated with the sustainability-related risks and opportunities
that affect the company’s ability to generate cash flows;
2. Analyze and develop knowledge from the data; and
3. Craft a strategy based on the findings.
4.
Figure 20—Pathway to a sustainable business strategy

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This process mirrors many other frameworks for translating business information into busi-
ness strategy. For example, Deloitte outlines a business intelligence framework that identifies an
iterative value creation pathway. The pathway starts with metrics, which yield data, that become
knowledge when supplemented with additional context to ultimately create understanding. When
that knowledge guides appropriate action, it yields innovation that impacts the entire business,
which subsequently can create value for the company.225
The most relevant sustainability metrics for strategists are those linked to the company’s ability
to generate financial returns. That link is incorporated into the metrics within the IFRS Sustainability
Disclosure Standards and SASB Standards (see Section 10.3.1.1.2. and 11.3.1.2.).

14.5.2. DISCLOSURE METRICS AS KEY PERFORMANCE INDICATORS

The metrics provided by sustainability disclosure standards can serve as key performance
indicators (KPIs) for company management. Identifying the right KPIs is a fundamental step in
successful sustainable business strategy development because they offer direct information that
can be used to evaluate how well a company is managing a risk or opportunity. While it is popular
practice to begin by developing and then following sustainability policies, a look ‘under the hood’
reveals that the practice of policy development does not necessarily lead to improved perfor-
mance. In fact, the opposite might be true.
A report published by the BlackRock Investment Institute examined the relationship between
business controversies and the presence of ESG policies. The study found that ‘firms that boast
the most elaborate ESG policies were the worst actors’ and were ‘more likely to be ensnared in
lawsuits and regulatory actions or controversies such as hiring discrimination, price fixing or tax
fraud.’ In contrast, companies that disclosed the fewest ESG policies were the most trouble-free.226
This preliminary research suggests that, in some cases, ESG policies are written as a reaction
to poor performance but do not necessarily lead to positive change. At the end of the day, poli-
cies do not provide information useful for decision-making. Two companies can have the same
policy and yet achieve very different results. Key performance metrics linked to specific risks and
opportunities can go much further in informing a firm’s value creation prospects.

14.5.3. CONNECTING SUSTAINABILITY METRICS TO STRATEGY

Companies often analyze their ability to create and sustain competitive advantage within their
industries. These analyses consider industry context, the competitive landscape, and the capabil-
ities and resources of the firm and its value chain. Through this process, companies develop and
assess potential options to create value and test or implement those deemed likely to succeed.
They then monitor results and refine their practices as needed.
Incorporating metrics from the IFRS Sustainability Disclosure Standards, including the SASB
Standards and Industry-based Guidance, into this process and other existing strategy frameworks
can support sustainable business strategy in three ways:
1. Metrics directly tied to investor-focused materiality can support companies in aligning
sustainability with financial performance;

225 Prashant Pant, ‘Business Intelligence (BI): How to Build Successful BI Strategy,’ Deloitte, 2009.
226 BlackRock Investment Institute, ‘Sustainability Investing: A ‘Why-Not’ Moment,’ May 2018.

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2. Analyses that include material sustainability information are often more complete, which
can prevent unwelcome surprises for the company and its investors; and
3. The effective management of sustainability-related risks and opportunities can support
companies in effectively differentiating themselves from their peers, helping to attract
customers and investors.

Example: Pirelli & C. S.p.A.

Tire manufacturer Pirelli capitalized on 49.8% of Pirelli’s sales, with their growth rate
an opportunity to create value related more than doubling the company’s overall
to a metric in the SASB Standards for the sales growth. Using this approach, Pirelli’s
Materials Efficiency topic—the percentage input costs are reduced, its manufacturing
of input materials consisting of recycled or process consumes less energy, and its
remanufactured content. Such initiatives products reduce fuel consumption by
not only lower the environmental lifecycle 5-7%—with a corresponding impact on
impact of vehicles, they also help auto parts CO2 emissions—due to their low rolling
companies more effectively manage risks resistance. The initiative’s success is due
related to the pricing volatility and the cost in part to its alignment with Pirelli’s business
of revenue, thereby enhancing margins. In strategy, which deeply embeds sustainability
2009, Pirelli launched a Green Performance considerations into the culture of the firm.
Strategy to produce tires that combine An unexpected benefit of the strategy led
performance and environmental sustain- to a doubling in the number of analysts
ability. As part of the strategy, the compa- covering the Pirelli stock, from 12 to 25.
ny identified an opportunity to minimize Although the metric did not exist when Pirelli
its costs and attract new customers by launched its Green Performance Strategy, this
developing high-performance silica—which case serves as an example of how metrics’
improves the safety and durability of tires— inherent connection to industry-specific value
from food waste such as rice husks. drivers makes them useful starting points for
identifying opportunities for value creation.
The Green Performance tires now account for
Sources: Pirelli, Annual Report 2018 (May 17, 2019).; UN PRI and Global Compact LEAD, The Value Driver
Model: A Tool for Communicating the Business Value of Sustainability, December 2013.; Jose M Asumendi,.
Pirelli & C. SpA, J.P. Morgan-Cazenove Europe Equity Research, 18 July 2013.; Shared Value Initiative, “Pirelli
Uses Rice Husks in Tires to Reduce Waste and Save Fuel, ”accessed 26 July 2019.

Harvard Business School research indicates that firms can achieve superior accounting and
market returns by efficiently focusing their efforts on ‘material sustainability issues’.227 In this way,
referring to the IFRS Sustainability Disclosure Standards and required guidance to identify disclo-
sure topics and metrics not only serve as the starting point of disclosure, but also the starting point
of effective strategy development.

227 Khan, Serafeim, and Yoon, ‘Corporate Sustainability: First Evidence of Materiality.’

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14.5.3.1. Sustainability information and management accounting

Just as internal audit teams have experience with disclosure processes and can lend insight
into how to integrate sustainability information for disclosure, management accountants have
experience developing and evaluating data to inform management decisions and can integrate
sustainability information into those decisions.
A report by the Institute of Management Accountants discusses this alignment. Consider that
operations strategies have a clear and direct link to profit through operating costs, cost of goods
sold, and other costs linked to core business activities. Diversification strategies, typically longer
term, can also be directly linked to profit and are typically assessed using profitability ratios.
Managerial accounting processes are equipped to measure the financial impacts of company
actions and trends, such as those enacted in accordance with operational and diversification
goals. The sustainability performance factors included in sustainable business strategies can be
linked to a wide range of financial impacts. However, sustainability accounting uniquely aims to
measure how the performance of one sustainability measure influences financial outcomes, with
the goal of improving the performance of these measures simultaneously. 228
Luckily, managerial accounting as a discipline has experience with non-monetary informa-
tion and is equipped to integrate sustainability information within accounting practices to inform
management’s decisions. Similar to the way management may use the conversion rate (a non-mon-
etary measure) associated with new-product marketing efforts to inform their interpretation of
overall sales performance, so can they use sustainability metrics to interpret broader strate-
gic objectives. By providing relevant, accurate and timely information, integrated management
accounting processes can play a vital role in effectively managing sustainability-related risks and
opportunities.

14.5.4. PERFORMANCE MANAGEMENT

As companies continually develop and hone their sustainable business strategy, their perfor-
mance goals will likely be most effective when chosen for their connection to financial and
operating results.229 Because they are directly linked to specific value drivers, metrics in the IFRS
Sustainability Disclosure Standards and required guidance can be incorporated into existing
performance evaluation systems to set targets and measure progress. In the Pirelli example above,
the Materials Efficiency disclosure topic is correlated with multiple value drivers—market share,
new markets, cost of revenue, research and development and contingent liabilities and provisions.
A specific professional role or team commonly assumes responsibility for traditional financial
performance management. The same approach benefits sustainability-related performance.230 By
having a dedicated individual or group focused on sustainability metrics linked to financial perfor-
mance, a company is more likely to mitigate risk and capitalize on opportunities.

228 Marc J. Epstein, Adriana Rejc Buhovac, and Kristi Yuthas, ‘Managing Social, Environmental, and Financial Performance
Simultaneously: What Can We Learn from Corporate Best Practices?,’ IMA Research Foundation, 2009.
229 Chartered Institute of Management Accountants, ‘Accounting for Climate Change: How Management Accountants Can Help
Organisations Mitigate and Adapt to Climate Change,’ February 2010; Carol Casazza, ‘Oversight of Corporate Sustainability
Activities,’ NACD, 2014.
230 Sheila Bonini, and Steven Swartz, ‘McKinsey Profits with Purpose: How Organizing for Sustainability Can Benefit the Bottom Line,’
2014.

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14.5.4.1. Stages of value creation

The process by which a company creates value tends to follow certain stages. These stages
move along a continuum from ‘doing things differently to doing different things,’231 and have been
identified in research and analysis by the Harvard Business Review, MIT Sloan Management
Review, Accenture and Deloitte.
In the initial stage, value emerges from cost and risk management initiatives—the low-hanging
fruit. As value is captured through cost reduction, the company tends to move on to the second
stage: optimizing efficiencies and redesigning products and processes.232
The first two stages—minimizing costs and optimizing efficiencies—yield incremental value.
The next two stages begin to deliver much more. In the third stage, when sustainability metrics
are integrated into performance evaluation systems, savvy companies will see opportunities for
new products, services and technologies, which can foster new business models and sources of
value. As innovations mature and become more embedded in the organization, the most success-
ful companies may enter a fourth stage. In this stage, value creation may be maximized through
competitive differentiation. The resulting corporate culture and brand leadership can help create a
competitive advantage.233 The below table summarizes the four stages (amalgamized from several
leading organizations) and provides an example initiative for each stage.234 The examples repre-
sent the environment dimension of sustainability; however, the four stages can also be applied to
other sustainability dimensions.

Table 7—Four stages of value creation

Four Stages of Examples

Value Creation
1. Minimizing costs Since 1975, 3M has saved US$1.7 billion by changing products or processes and
recycling or reusing materials (e.g., replacing a solvent-based paper treatment
process with a water-based process).
2. Optimizing efficiencies Through its ‘zero waste’ initiative, DuPont weighed future earnings against business
and environmental risks, eliminating divisions with significant waste products (e.g.,
carpets and nylons).
3. New products and/or Dow’s focus on sustainability innovation led to new products and breakthroughs such
technologies as solar roof shingles and hybrid batteries, which helped shift Dow’s core business
from commodity chemicals to advanced materials and high-tech energy.
4. New business models GE’s Ecomagination initiative generated US$160 billion in revenue between 2005
and differentiated value and 2014 based on US$12 billion in R&D. Consequently, GE has emerged as a differ-
proposition entiated energy and environmental solutions provider.

Recognizably, sustainability integration exists on a spectrum of a risk and productivity mind-

set—or making incremental changes to ‘do less bad’—to a mindset of optimizing company

231 Eugene Goh, Knut Haanaes, David Kiron, Nina Kruschwitz, and Martin Reeves, ‘The Innovation Bottom Line,’ MIT Sloan Management
Review, Winter 2013.
232 Daniel C. Esty and David A. Lubin, ‘The Sustainability Imperative,’ Harvard Business Review, May 2010.
233 Goh et al., ‘The Innovation Bottom Line’; Daniel C. Esty and David A. Lubin, ‘Bridging the Sustainability Gap,’ 2014; Accenture and
CECP, ‘Business at Its Best: Driving Sustainable Value Creation—Five Imperatives for Corporate CEOs,’ 2011; Grocery Manufacturers
Association/Food Products Association and Deloitte, ‘Sustainability: Balancing Opportunity and Risk in the Consumer Products
Industry,’ 2007.
234 Daniel C. Esty and David A. Lubin, ‘The Sustainability Imperative,’ Harvard Business Review, May 2010.

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strengths to create shared value. Both are necessary to create value.

Attracting long-term investors

Effectively managing sustainability-related risks and opportunities can aid companies in
attracting and maintaining investors with a long-term orientation. Many investors seek to engage
companies specifically on the strengths of a company’s sustainable business strategy and its abil-
ity to communicate the connection between sustainability and financial outcomes. For example,
when State Street Global Advisors seeks to address sustainability issues, it poses the following
questions for boards:
1. Has the company analyzed and incorporated sustainability issues, where relevant, into its
long-term strategy?
2. Does the company consider long-term sustainability trends in capital allocation decisions?
3. Is the board equipped to adequately evaluate and oversee the sustainability aspects of the
company’s long-term strategy?
4. Does the company’s reporting clearly articulate the influence of sustainability issues on
strategy?
5. Is the board incorporating key sustainability drivers into performance evaluation and
compensation programs? 235
Successful sustainable business strategies become not only a means to enhance company
performance but also a vital component of investor relations. The way companies communicate
their strategy has implications for their access to capital and overall attractiveness over time.

14.5.5. THE ROLE OF SUSTAINABILITY IN CORPORATE RISK MANAGEMENT

As identified above, focusing on risk management related to sustainability is often the first
steps companies take. Indeed, long-term value cannot be optimized without adequate risk
management. However, enterprise risk management extends far beyond an initial checkpoint for
successful sustainable business performance management. Ongoing management of sustainabil-
ity risk serves as a keystone function when integrating sustainability information into core strategic
initiatives.
The widely adopted Committee of Sponsoring Organizations of the Treadway Commission
(COSO) Enterprise Risk Management (ERM) Framework defines ‘ERM’ as ‘the culture, capabili-
ties and practices, integrated with strategy-setting and performance, that organizations rely on
to manage risk in creating, preserving and realizing value.’ ERM processes are fundamentally
concerned with identifying and addressing business uncertainty, mitigating hazards, and comply-
ing with regulations. Risk management activities aim to help companies identify, assess and
prepare for risks, both internal and external, that may interfere with earnings goals and operating
objectives. The COSO ERM Framework describes ERM as a process that:

• is established and implemented by an entity’s board of directors, management and other

personnel;

• is applied in a strategy setting and across the enterprise;

235 State Street Global Advisors, ‘Incorporating Sustainability into Long-Term Strategy,’ February 2019.

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• is designed to identify potential events that could negatively affect the entity;

• manages risks to contain them within the organization’s risk appetite; and

• provides reasonable assurance regarding the achievement of entity objectives.236

Companies with mature risk management practices have been found to outperform their
competitors and achieve higher market valuations, yet a minority of companies have comprehen-
sive enterprise risk management programs in place.237 Similarly, the World Business Council for
Sustainable Development’s research on risk management and sustainability practitioners shows
that most practitioners (89%) agree that sustainability risks could lead to a significant impact on
business, while more than 70% find that ‘risk management practices are not adequately address-
ing sustainability risks.’238 ERM can be a tool for understanding sustainability risks with the potential
to negatively impact a company’s ability to achieve business objectives.239
As highlighted by COSO’s ERM definition, one would be remiss to think of ERM solely as an
exercise in compliance and rule-setting to protect value.240 Rather, ERM can be thought of as a
holistic process for identifying enterprise-wide risks241 (whether strategic, financial, operational,
legal or otherwise) and how those risks can be managed to enhance financial position, financial
performance and prospects.242 ERM can also play a role in identifying strategic opportunities. The
process of identifying risks across an company puts management in a good position to not only
reduce negative impacts but to identify opportunities with the potential to yield positive returns as
well.243 The purposes and processes of ERM and integrated sustainable business management
are mutually supportive and strongly aligned.

14.5.5.1. Connecting ERM and sustainability to strategy

In 2018, COSO and WBCSD jointly published guidance to support companies in integrating
sustainability-related risks into ERM processes. The guidance, titled Enterprise Risk Management:
Integrating with Strategy and Performance, details five components of effective ESG-ERM
integration:
1. Governance and culture of ESG-related risks: Governance and internal oversight
determines how decisions are made and how these decisions are executed.
2. Strategy and objective-setting for ESG-related risks: A strong understanding of
business context, strategy, and objectives anchors all ERM activities. Applying ERM to
ESG-related risks includes examining the value creation process to understand these
impacts and dependencies in the short, medium and long term.
3. Performance for ESG-related risks: Includes identifying risks, assessing and prioritizing
risks and implementing risk responses.
4. Review and revision of ESG-related risks: Companies can develop specific indicators

236 COSO, ‘Enterprise Risk Management—Integrated Framework,’ September 2004.

237 Gregg E. Anderson, ‘Want to Get Serious About Sustainability? Use SASB’s Standards to Inform ERM,’ Crowe, June 2017.
238 WBCSD, ‘Sustainability and Enterprise Risk Management: The First Step Toward Integration,’ January 2017.
239 Deloitte Global Center for Corporate Governance, ‘Sustainability and the Board: What Do Directors Need To Know in 2018?,’ March
2018.
240 Robert S. Kaplan and Anette Mikes, ‘Managing Risks: A New Framework,’ Harvard Business Review, June 2012.
241 Russ Bahnam, ‘ERM: Viewing Risk as Opportunity,’ Wall Street Journal, n.d.
242 COSO, ‘Enterprise Risk Management—Integrated Framework,’ September 2004.
243 Bahnam, ‘ERM: Viewing Risk as Opportunity.’

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to alert management of changes that need to be reflected in risk identification, assessment

and response. This information is reported to a range of internal and external stakeholders.
5. Information, communication and reporting for ESG-related risks: Includes cross-
functionally communicating to identify the most appropriate information to be communicated
and reported internally and externally to support risk-informed decision-making.244
One will notice direct connections between these five components and the elements of
sustainable business strategy discussed earlier in the chapter. Where risk-related information
enhances a company’s ability to generate value, sustainability-related information can provide
a more complete picture of a company’s risk landscape. Both are subject to the same internal
processes. In a world where academics and capital markets participants increasingly recog-
nize ‘that the real opportunities for sustainability-driven growth come when companies integrate
sustainability into their core business functions,’245 the presence of sustainability information in
ERM activities can signal a company’s ability to integrate sustainability into core strategy.

14.5.5.2. Enterprise risk management, board risk oversight and investor confidence
A company’s board of directors plays an integral role in overseeing enterprise-wide
approaches to risk management and determining if the company’s strategy aligns with its risk
appetite. The board also plays a role in assessing the effectiveness of risk management processes
and monitoring the most significant risks the company may face.246 As a discipline, ERM encour-
ages corporations to not only identify and actively manage the risks they face but also to make
risk management plans available to shareholders and potential investors as part of their annual
reports. 247 Integration of sustainability-related risks into broader ERM practices can enable
management and the board to assess overall resource needs and allocate capital more effec-
tively.248 The efficacy of board oversight of sustainability-related risks within an ERM system can
directly influence investors’ confidence and related risk evaluations.

14.5.5.3. ERM and the IFRS Sustainability Disclosure Standards

The IFRS Sustainability Disclosure Standards, including the SASB Standards sources of guid-
ance, can be used to identify and measure sustainability-related risks at various stages of the risk
management process. These stages generally include:
1. Identification: The Standards support companies in identifying the sustainability-related
risks and opportunities that could reasonably be expected to affect the entity’s cash flows,
its access to finance or cost of capital over the short, medium and long term.
2. Assessment: Metrics provided by the Standards can help companies better assess their
management of certain risks and opportunities, and analysis conducted for disclosure can
provide insight into the nature, likelihood and magnitude of the effects of those risks and
opportunities.
3. Response: Based on these assessments and peer benchmarking, a company can

244 COSO and WBCSD, ‘Enterprise Risk Management—Integrating with Strategy and Performance,’ June 2017.
245 Daniel C. Etsy and Quentin Karpilow, ‘Harnessing Investor Interest in Sustainability: The Next Frontier in Environmental Information
Regulation,’ Yale Journal of Regulation 36 (2019): 642.
246 COSO, ‘Effective Enterprise Risk Oversight: The Role of the Board of Directors,’ 2009.
247 Will Kenton, ‘Enterprise Risk Management (ERM),’ Investopedia, September 2020.
248 COSO, ‘Enterprise Risk Management—Integrated Framework,’ September 2004.

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better understand whether to accept, avoid, reduce or transfer a risk (or ignore, embrace,
enhance or share an opportunity).
4. Monitoring: Metrics provided by the Standards can support internal decision-making,
including through integration into performance dashboards.
5. Reporting: Metrics are designed to support investor decision-making but may also be
useful to other internal and external stakeholders.
Although risk management activities are often framed as an initial step in developing an effec-
tive sustainable business strategy, enterprise risk management represents a vital, ongoing process
in which risks are continually assessed and managed, enabling companies to meet their strate-
gic goals and objectives. The forward-looking and integrated nature of ERM aligns with requisite
processes for collecting and using sustainability information to manage company performance.
After all, a sustainable business strategy will not succeed if it does not account for the risks with
the potential to chronically or suddenly harm its financial position, performance and prospects.

CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
13 RECOGNIZE the cross-functional nature of preparing sustainability disclosures.

14 DISTINGUISH the stages of sustainability disclosure.

15 IDENTIFY the influence of board governance, internal controls and third-party

assurance on the reliability of sustainability information.

16 RECOGNIZE the role of sustainability management in corporate strategy and

risk management.

? CHECK YOUR UNDERSTANDING

1. How does material sustainability information support cross-functional communication?

2. Why do companies pursue sustainability disclosure?

3. H
 ow do sustainability metrics contribute to strategic decision making and corporate
management?

JUMP TO ANSWERS

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CONSIDERATIONS
FOR INVESTOR
USE
15
LEARNING OBJECTIVE(S) COVERED IN THIS CHAPTER:

17 IDENTIFY how sustainability information is used in public equities (active and

passive).

18 IDENTIFY how sustainability information is used in corporate fixed income.

19 IDENTIFY how sustainability information is used in private markets.

20 IDENTIFY the challenges investors face in using sustainability information and

how those challenges impact the market.

15.1. OVERVIEW OF SUSTAINABILITY IN INVESTING

A wide variety of individuals and organizations invest in capital markets, each with their own
unique strategies, risk tolerances, investment objectives, time horizons and sources of available
capital. All investors, however, share one characteristic: they value information. The more opaque
a company is about its operations and outcomes, the more difficult it is for investors to assess the
company. All else being equal, such firms are usually seen as riskier investments.
Investors and analysts are increasingly looking beyond financial statements and seeking out
sustainability data to enhance their understanding of the risks and opportunities a company faces.
Different investors use sustainability information in different ways.
For example:

• Many institutional investors incorporate sustainability information into investment processes

either to enhance their ability to generate alpha (meaning increasing financial return
beyond a benchmark) or to manage risk (meaning mitigating potential value loss). Including
material sustainability information in the investment decision-making process can help
deliver valuations and may yield superior risk-adjusted returns.

• Many interpretations of fiduciary duty suggest that asset managers have a responsibility to
consider sustainability-related risks and opportunities as part of their duty of care, including
material sustainability information and its portfolio-level impacts.

• Many brokerage firms offer sustainable investing programs designed to support retail
investors who want to ‘do well while doing good.’ Through these programs, investors can
support a cause they believe in while also receiving a comparable financial return (unlike

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philanthropic donations).

• Many endowments, foundations and high-net-worth individuals invest because they want
to have a positive impact and/or align their investments with their philosophical views or
organizational missions, such as labor rights or environmental protection.

• Many types of investors seek dual returns, where investments generate both alpha-
generating/risk-reduction benefits and mission alignment.
A wide range of reasons influence why and how an investor might use sustainability informa-
tion. A simple way to think about that range is on a spectrum where investors optimize for ‘value’
on one end and ‘values’ on the other. Yet a growing body of research has shown that there is not
necessarily a tradeoff between the two. Investors can enhance financial value while also aligning
with ethical, philosophical, religious or other moral values. The goal to build a better world and
goal to build a better portfolio are not mutually exlcusive.
Note that the above are generalizations and do not apply universally. Some retail investors use
sustainability information to achieve superior risk-adjusted returns, while some pension funds are
primarily interested in practicing mission-aligned investing. By facilitating the production of mate-
rial, decision-useful information, the IFRS Sustainability Disclosure Standards provide a range of
investors with the ability to assess the financial position, financial performance and prospects of
a company based on how well it manages sustainability-related risks and opportunities.

15.1.1. INVESTOR USE OF MATERIAL SUSTAINABILITY INFORMATION

High quality sustainability disclosure standards—and the data they yield—can support the full
spectrum of investment activities, from top-down allocation of assets in a portfolio to the individual
security selection. The information produced using the IFRS Sustainability Disclosure Standards
and sources of guidance can help investors achieve their unique goals by helping answer specific
questions such as:

• How do sustainability-related risks and opportunities impact the core value drivers in
industry-level analysis?

• How will emerging sustainability-related risks and opportunities unfold over the investment
time horizon?

• How do companies leverage opportunities or mitigate risks?

• How can sustainability metrics be integrated into firm-level analysis, either on a comparative
basis or in terms of fundamental valuation?

• How do differentiated, industry-specific sustainability-related risks or opportunities affect a

portfolio across all sectors? Which industries are facing headwinds or tailwinds?

• How do certain industry-based disclosure topics and metrics impact key signals of risk and
return pertinent to underwriting decisions?
Indeed, a diverse range of investors use standards to inform their investment process. For
example, UBS Asset Management uses the SASB Standards to inform sustainability informa-
tion industry by industry, helping augment traditional fundamental analysis as it works to identify
equities that are both priced attractively priced today and poised to deliver returns over the long

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term249 . Nordea Asset Management integrates SASB Standards into its investment strategy, funda-
mental strategy and valuation analysis in stock selection and valuation analysis while building and
adjusting the firm’s emerging market equity fund. The Standards are used to help identify compa-
nies that generate sustainable shareholder value and outperform the benchmark.250 State Street
Global Advisors uses SASB Standards to power the R-Factor™, an ESG scoring system for listed
companies that is fully integrated into its asset stewardship program, enabling focused corporate
engagement and empowering boards and management teams to assess and address specific
sustainability dimensions.251
Comparable sustainability information not only helps a range of investors achieve their goals
but also generates system-wide benefits. As companies disclose more comparable information,
investors can shift from the time-intensive process of adjusting non-comparable information to fit
into their own models and frameworks to the activities they do best: analyzing and interpreting the
information. The IFRS Sustainability Disclosure Standards can support that shift in two key ways:
The Standards’ focus on the information that is reasonably likely to influence investor decisions
can make it easier for investors to identify and access the information pertinent to their decisions.
By analyzing the sustainability information tied to a company’s financial performance, investors
can avoid losing the signal in the noise of other sustainability information.
It can be more natural for companies (and their investors) to report (and use) financial state-
ments and sustainability-related financial disclosure together. Alignment between the two reporting
functions can reduce reporting friction and thus contribute to more efficient markets.
In fact, the presentation of sustainability information within general purpose financial reporting
may even influence company valuation. One study sought to assess whether market partici-
pants always rationally process ESG information included in stand-alone sustainability reports.
Interestingly, it found that users of stand-alone reports primarily adjust their valuations based on
negative ESG performance. Users of integrated reports, where financial and sustainability data is
presented side by side, adjust their valuations based on both positive and negative performance.
Ultimately, investors may arrive at different decisions when sustainability and financial performance
information is presented together.252

15.2. A SPECTRUM OF THE USE OF SUSTAINABILITY

INFORMATION
15.2.1. FINDING COMMON GROUND
The variety of approaches and philosophies to using sustainability information mirror the
diversity of investors in capital markets and the clients they serve. As sustainability information
continues to be integrated into investment processes in increasingly diverse and sophisticated
ways, a vast lexicon of terminology continues to develop around it. The evolution of ESG language

249 Thomas J. Digenan, ‘UBS Asset Management Priceless: Doing Well While Doing Good–SASB and the Aspiration Redwood Fund,’
August 2019.
250 Nordea Asset Management, 2017 SASB ESG Integration Insights, ‘Nordea 1 Emerging Stars Equity Fund—ESG Integration in
Emerging Market,’ 2017.
251 Rakhi Kumar, ‘R-Factor™ Reinventing ESG Investing Through a Transparent Scoring System,’ Insights ESG, July 2019.
252 Marcus C. Arnold, Alexander Bassen, and Ralf Frank, ‘Integrating Sustainability Reports into Financial Statements: An Experimental
Study,’ 11 June 2020.

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in investing and its lack of universal definitions can create confusion. However, analysis of a vari-
ety of key resources dedicated to demystifying sustainability terminology surfaces commonalities
in the field. The below description of sustainability investing strategies draw out commonalities
among characterizations from the CFA Institute, the European Sustainable Investment Forum
(Eurosif), Principles for Responsible Investment, McKinsey, the Investment Company Institute,
BlackRock, Vanguard, State Street Global Advisors, Northern Trust Asset Management, and Bank
of America.
At its simplest level, sustainability information is used to:

• make decisions about exclusionary or negative screening (e.g., avoiding objectionable or

low-performing investments such as weapons manufacturers or tobacco companies); and

• make decisions about which investments to prioritize or actively select (e.g., beverage
manufacturers that prioritize managing water risk).
Note, however, that though dichotomous, these two approaches are not mutually exclusive and
are often combined (e.g., avoiding weapons manufactures while also prioritizing beverage manu-
facturers that demonstrate superior water-risk management). Investing strategies have differing
degrees of utility and popularity throughout different asset classes—nothing prohibits one strategy
from being used in only one asset class. Based on information sourced from the abovementioned
entities, the following section explores these categorizations. The below definitions and explana-
tions are not absolute. A reasonable person may have different or more nuanced opinions about
key terms. They do, however, reflect a general agreement among key actors in this space.

15.2.2. A RANGE OF STRATEGIES

15.2.2.1. Exclusionary screening

Notably, some of the earliest uses of sustainability information in investing were in strategies
referred to under the umbrella called socially responsible investing (SRI). SRI practices often
entailed (and in many cases still entail today) excluding those investments affiliated with certain
geographic conflicts (such as apartheid in South Africa) or operating in ‘sin stock’ industries such
as weapons, gambling, alcohol or tobacco. For this reason, SRI is often associated with exclu-
sionary screening.
Today, ‘exclusionary screening’ refers to investment strategies employed to avoid specific
investments. Sustainability information can be used to inform exclusionary screening processes,
which can be either values-based or norms-based. Typically, exclusionary screening is imple-
mented before any investment analysis takes place.
Values-based screens aim to avoid investments based on the beliefs or ethical standards of
the investors. For example, an investor may screen out alcohol and tobacco companies to avoid
association with harmful substances. Or an investor may screen out investments operating in
certain geographies because of ethical concerns regarding a company’s involvement in human
rights conflicts.
Norms-based screening tends to exclude investments based on a company’s behavior
regarding internationally accepted norms and standards surrounding human rights, labor prac-
tices and other issues. For example, an investor may exclude companies that do not adhere to

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the UN Global Compact principles or the Universal Declaration of Human Rights. Norms-based
screening can also exclude companies identified for their involvement in particularly egregious
events, such as the BP oil spill or Volkswagen emissions scandal. These are sometimes referred
to as ‘extreme ESG controversies.’ Investors sometimes rank such events according to their level
of severity (e.g., a ‘category 5 controversy’). This application of norms-based investing is perhaps
the most common. Most investors will seek to avoid investing in companies demonstrating risky
behavior or poor risk management to avoid the major controversial incidents, even if their invest-
ment strategy does not center on exclusionary screening based on more-specific company
characteristics.
Given the complexity of some industries and companies, the practice of exclusionary screen-
ing is not always a black-and-white decision. Consider the above values-based decision to
exclude companies operating in the Alcoholic Beverages industry. Some otherwise attractive
investments may own small subsidiaries involved with alcoholic beverages. In such situations,
investors will often set a limit for how much revenue can be generated from that line of business,
such as 5%, 10%, or 30% of total revenue. The same strategy can be applied to geographic exclu-
sions based on human rights concerns. A food and beverage company may have cocoa-sourcing
operations in parts of Western Africa associated with child labor concerns, where cocoa-con-
taining products make up a small fraction of the company’s total product mix. Values-based
exclusionary decisions, whether a reflection of industry, geography or some other factor, do not
necessarily allow for simple yes or no decisions. Rather, exclusions often reflect decisions about
acceptable or unacceptable levels of exposure.

15.2.2.2. Inclusionary investment strategies

As investors have evolved their use of sustainability information from exclusionary screening
to inclusionary strategies, the use of sustainability information in investing has become increas-
ingly sophisticated.
Rather than setting criteria to decide which firms not to invest in, positive screening is used
to prioritize and/or actively choose firms to invest in based on certain criteria. Investors use many
variations of positive screening, though the most common applications are a best-in-class and
ESG momentum approach.

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Best-in-class vs. Momentum

In active public equity, the best-in-class approach to ESG investing refers to the selec-
tion of companies that meet a defined ESG performance hurdle, usually measured using
an ESG score or ranking. Investors seek companies that achieve a top-half, quartile, or
decile ESG ranking. The best-in-class theory assumes that companies that demonstrate
effective management of sustainability-related risks and opportunities are at a competitive
advantage and will continue to deliver strong financial performance.

Momentum strategies, sometimes called directional strategies, target companies that do

not meet top performance hurdles but that demonstrate recent, significant improvement.
This strategy predicts that, by overweighting companies likely to experience significant
jumps in performance, the investor can realize larger gains relative to the marginal (and
often diminishing) returns of a best-in-class approach. Directional strategies can be good
for new companies. Some investors are keen to provide capital to firms that are not top
performers currently but that demonstrate (via disclosure) positive momentum. Contrary to
some companies’ concerns that disclosing performance below the industry average could
hurt their attractiveness (and therefore their choice not to disclose), those companies can
be very attractive to some investors if the companies demonstrate improved performance.

For example, an investor applying a best-in-class screen using sustainability information may
include only those companies that score in the 90th percentile or higher of an ESG rating. Investors
applying a momentum screen using sustainability information may look at the change in ESG
scores over a two-to-four-year period to calculate a momentum factor, which is then used to
predict the firm’s potential to generate excess returns. The practice of inclusion opens up the door
for investors to influence corporate behavior and enhance the investment research and selection
process with sustainability information, creating competition among companies on sustainability
measures.
‘Thematic investing’ refers to a practice whereby investors optimize capital allocation to a
specific sustainability matter. It can also refer to an investment approach supporting a broader
industry trend, such as renewable energy technology, social entrepreneurship or water resource
stewardship. A thematic investor will select a company based on the firm’s ability to contribute
to the identified theme. For example, a clean water fund might invest in global water securities
ranging from water conditioning and desalinization to water bottling and distribution and waste-
water treatment. Thematic investors often experience a high tracking error given the strategies’
focused approach, where there is a measurable difference between the returns expected by the
investor and the returns received.
Different from a strictly values-based or thematic approach, impact investing considers
sustainability information in investment products and strategies with the goal of creating positive
impacts alongside financial returns. Notably, ‘impact investing’ can mean different things to differ-
ent investors—the investing landscape today sees a range of legitimate variations in uses and
application of the term. A few characteristics, originally articulated by Eurosif, distinguish impact
investing from other strategies. For the purposes of the FSA Curriculum, an impact investment has
the following characteristics:

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• Intention: An impact investor acts with the explicit goal of achieving social or environmental
impact. If an investment inadvertently generates positive social or environmental returns, it
is not considered to be impact investing.

• Impact measurement: The impact generated by the investment is nearly always measured
and reported to assess whether the investment achieved the desired impact. Performance
is tracked through qualitative and quantitative impact data.

• Impact management: Data informs decision-making with the goal of mitigating negative
impacts and maximizing positive outcomes. Financial returns are also considered (it is
investing, not philanthropy after all). Unlike traditional investing, impact investing expects
that returns may range from below market to market rate.
Impact investments can take a variety of forms across asset classes. They can be proj-
ect-focused, where investors use specific impact-focused investment tools such as green bonds
(elaborated on below) to fund a specific project, like a renewable energy infrastructure project.
They can also target companies generating impact by virtue of their business model, such as
investments made to microfinance institutions focused on rural economic development, or a corpo-
ration generating positive outcomes through a specific product or service. Lenders may practice
impact investing by ‘drawing a fence’ around environmental or social activities included in their
loan portfolio, such as green mortgages in real estate.
One way to practice impact investing is through thematic bonds, such as green bonds,
climate bonds, social bonds and sustainability-linked bonds. Thematic bonds were created to
fund projects that generate positive impacts. For example, a green bond may be used to finance
a renewable energy or sustainable infrastructure project. A social bond may be used to fund
projects related to education access or prison reform. Sustainability bonds fund projects with
a combination of environmental and social impact goals. In terms of structure, risk, and return,
thematic bonds are often identical to traditional bonds, though they must adhere to specific crite-
ria (such as proceeds’ tracking and post-project reporting) and reporting requirements (such
as use of proceeds) to ensure their thematic nature is being faithfully marketed. In some cases,
thematic bond issues may even include impact hurdles. A parallel concept to hurdle rate, impact
hurdles stipulate the rate at which investors will be paid back based on a bond’s ability to achieve
predefined impact targets.
ESG integration strategies incorporate sustainability information into traditional security selec-
tion processes. ESG integration strategies evaluate environmental, social and governance factors
alongside a mosaic of traditional financial factors to identify and evaluate risks and opportunities
that may otherwise remain hidden. With ESG integration, investors adjust traditional analysis using
sustainability information, such as financial models adjusted for revenue, costs, off-balance-sheet
liabilities or adjustments to capital cost. The purpose is not to apply social or environmental values
to investment decisions, but to consider whether sustainability matters contribute to, or detract
from, a given investment opportunity. For example, a traditional investor who incorporates sustain-
ability information may consider investing in several fossil fuels firms, using GHG performance
data and reduction targets to help determine which will yield the most competitive risk-adjusted
return.
Save for exclusionary screens, asset managers and asset owners can engage in investment
stewardship and active ownership practices through any of the above strategies. In addition to
pre-investment analysis, sustainability information supports the establishment of performance

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baselines, target setting and the identification of points of engagement between investors and
investees.

Figure 21—A range of investment strategies

The above strategies represent the spectrum of investing approaches that incorporate
sustainability information—from those allocating capital to companies and projects in order to
generate positive social and environmental impact, to those integrating sustainability information
in more traditional strategies to enhance risk-adjusted returns. As illustrated in Part III, the IFRS
Sustainability Disclosure Standards have been designed to enhance the reliability, decision-use-
fulness and comparability of sustainability information. While the Standards may certainly be
useful to strategies position on the ‘values’ end of the spectrum, they are particularly well suited
to support ESG integration.

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15.3. I NVESTOR APPLICATION OF CROSS-INDUSTRY VS.

INDUSTRY-SPECIFIC SUSTAINABILITY DATA
For any investor, it can be helpful to understand the difference between industry-agnostic or
‘cross-industry’ and industry-specific sustainability data. For any company, it can be useful to
understand the utility of each type of information to existing and potential investors. As discussed
in Section 6.3., different standards and frameworks developed in recent history facilitate the disclo-
sure of both types of information. Some facilitate the disclosure of industry-agnostic information,
some facilitate the disclosure of industry-specific information, and some include elements of both.
Indeed, the IFRS Sustainability Disclosure Standards include both cross-industry and indus-
try-specific metrics. These different levels of information can uniquely support investor analysis.
Outside of sustainability-specific disclosure standards and frameworks, cross-industry infor-
mation exists in the market in many forms. The information in most financial statements would
be considered cross-industry, for instance as would that provided in line with most corporate
governance codes. For example, the UK Governance Code (regulatory), Japan’s Corporate
Governance Code (quasi-regulatory), and the Investor Stewardship Group’s Corporate
Governance Principles for US-listed companies (non-regulatory) all establish principles of
sound, ethical and representative corporate governance that listed companies should adhere to.
Among other reporting guidance elements, each of the above entities establishes clear disclo-
sure principles related to shareholder rights, board responsibilities and incentives aligned with
mid-to-long-term value creation, among others. When companies disclose corporate governance
information according to a common set of principles, investors can assess and compare practices
equally across companies in different industries.
Such disclosure resources contribute to universally applied concepts of quality and respon-
sibility. There are certain standards and procedures that all corporations should adhere to. In
the case of corporate governance codes, issues regarding stakeholder engagement may affect
the value of a technology firm in generally the same way they would affect the value of a clothing
retailer (though some industry-specific nuance is to be expected).

Human capital: agnostic or specific?

The market is grappling with how to handle information related to human capital. On the one
hand, the value of all companies depends on the skills, knowledge and experience possessed
by the leadership, staff and workforce. On the other hand, a company’s labor force often has
unique value implications, depending on its business model and operating environment.

Example:The workforce of an information technology (IT) company impacts the firm’s value
differently from how the workforce of an agricultural products company does. In IT, an in-
dustry that competes on recruiting top talent and intellectual property, it might be incredibly
important for an investor to know how the company is recruiting and managing a global,
diverse, and highly skilled workforce. In agricultural products, an industry that requires use of
heavy machinery and exposed working conditions, it will likely be more important for an in-
vestor to know how the company is performing on measures of workforce health and safety.

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Investors can also derive significant value from industry-specific information. Industry-specific
data are particularly useful in the context of sustainability because sustainability-related risks and
opportunities can drive value in different ways across different industries. As mentioned in section
9.4.1., in some cases, the same sustainability matter relevant to one industry will not be relevant
to another. For example, risks related to customer privacy tend to be highly relevant to compa-
nies involved in managing sensitive customer information, such as those in consumer finance.
Risks related to customer privacy are far less likely to be relevant to, say, a construction materials
company that does not sell directly to consumers or gather sensitive data. In other cases, the
same sustainability matter can affect multiple industries, but in different ways. For example, risks
related to energy management tend to be highly relevant to companies in both the E-Commerce
and Hotels & Lodging industry. E-Commerce companies rely on energy-intensive data centers,
where greater efficiency can reduce operating costs and mitigate operational risk related to energy
availability. Hotels & Lodging companies also rely on large amounts of energy to operate and
can therefore also reduce operating costs through efficiency improvements, however energy
management can also improve intangible assets like brand image and reputation, attracting new
customers where environmental sustainability influences purchase decisions.
The decisions of investors are shaped in large part by their assessments of industry-specific
risks and opportunities that affect companies’ financial performance and prospects. In addition
to enhancing relevance and comparability, industry-specific metrics can also be cost-effective
for companies to disclose because they can incorporate metrics that are already in use within an
The Value of Industry Agnostic and Industry Specific Metrics
industry.
Many financially material metrics are industry specific, while many metrics that
capture environmental and social materiality are industry agnostic
Figure 22—Cross-industry and industry-specific metrics

Environmentally & societally material metrics (often industry-agnostic) –

e.g. gender equality policies, respect for human and labour rights

+ +

Industry-agnostic & material metrics – e.g. governance

+
Industry-specific & material metrics
Number of zero Specific employee % of restaurants Percentage of
emission vehicles, safety issue – sexual inspected by a food natural gas pipelines
hybrid vehicles and harassment of safety oversight inspected
plug-in hybrid housekeepers body & % receiving
vehicles critical violations

Automotive Hotels and lodging Restaurant industry Oil and gas

Both cross-industry and industry-specific information plays an important role in helping inves-
tors understand the actual and potential effects a sustainability-related risks or opportunity could

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have on a company’s revenues and expenses, assets and liabilities, and cost of capital. Still,
integrating that information into investment processes can be a multifaceted challenge for which
there is no simple, one-size-fits-all solution. Investors employ a wide array of tools and practices
to integrate sustainability information to meet their unique objectives.

15.4. THE PRE-INVESTMENT STAGE

As discussed above, investors use sustainability data in myriad ways. Different investing goals
require different strategies, which in turn require specific data. For example, for an investor to
apply exclusionary screening to businesses generating revenue from controversial weapons,
the investor will need to know the percentage of revenue from controversial weapons for every
company. However, for ESG integration, where the most important data is that needed to assess
the financial effects of risks and opportunities, the same percentage of revenue data may not be
useful to company analysis. Clarity of investment approach can thus help investors identify the
most useful sustainability data in the pre-investment stage.

15.4.1. DATA DECISIONS

Making good investment decisions starts with good data and a consistent framework for
applying it. Although sustainability disclosure standards are developed primarily as a source of
guidance for companies preparing disclosure, the information architecture they provide serve as
highly useful tools for investors sourcing data as well.

Sustainability disclosure standards as tools for identifying decision-useful information

To make sure they are starting with quality data, investors can find it beneficial to perform a
form of gap analysis to assess what sustainability information they have, what additional informa-
tion they could realistically access, and what gaps exist that cannot currently be filled.
As outlined in Section 5.2., investors access data from multiple sources, including individual
company disclosures, providers that offer aggregated data, ESG ratings and analytics platforms,
and unstructured data sources. When considering the range of available sources and data types,
it can be helpful to consider the data’s channels and how that data aligns or misaligns with current
investor practices.
Investors have struggled to find the signal within a very noisy data landscape. Unless an
investor first identifies the risks and opportunities that are reasonably likely to affect a company’s
prospects, it can be very challenging to identify what data is needed to conduct investment anal-
ysis. To help overcome this challenge, some investors have used the disclosure topics within the
SASB Standards (and now the IFRS Sustainability Disclosure Standards) as a template. Metrics in
the Standards can be mapped onto investors’ existing datasets to help identify how much deci-
sion-useful data they already have and what data needs to be gathered.
Through this process, investors might identify information that would be reasonably likely to
influence their decisions but is not currently available. In cases where existing standards already
encourage disclosure of this information in a voluntary context, such standards offer a clear means
for investors to ask their portfolio companies to report the desired data. If existing standards do
not yet encourage disclosure of the sustainability information, it opens an opportunity for inves-
tors to engage with standard-setters to explain why access to the specific data would be useful.

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Applying a consistent framework for analysis

For investors, it is crucial to have a consistent framework to use when determining what data to
apply to company analysis. As with traditional financial analysis, sustainability data inputs should
be linked to investment strategy and desired insights. As sustainability data is sourced for vari-
THE ESG INTEGRATION FRAMEWORK
ous types of analysis, it should be refined to reflect that information which best informs investors’
desired insights or investment
After extensive outcomes.
analysis of the ESG integration techniques of direct investors across
the globe, CFA Institute and PRI collated the many ESG integration techniques
used by practitioners and developed the ESG Integration Framework (see Figure 1).
Figure 22—PRI ESG Integration Framework
FIGURE 1: THE ESG INTEGRATION FRAMEWORK

IS
YS
AL RI
AN ESG and financial risk SK
IO M
AR exposures and limits AN
EN AG
SC Portfolio scenario

EM
analysis

EN
SE
CU

T
Forecasted RI
Internal credit TY
assessment financials & ratios VA
RESEARCH

LU
AT
IO
N—
Relative
ESG-integrated Centralized Value-at-risk

FIX
Forecasted ranking
research research analysis
financial
ratios note dashboard ED
ESG agenda at INC
Materiality OME
framework (committee)
meetings

Relative
Tactical asset SWOT analysis
ESG Voting value
allocation Valuation INTEGRATION analysis/
spread
S E CU R I T

multiples
analysis
Individual/
Internal ESG collaborative
research engagement
Y VA
LUA
ASS

Watch lists Company

questionnaires
T

Duration
ET A

IO N

Red-flag
analysis
indicators
—
LLO

Valuation-model
EQ

variables
UI

ESG profile (vs.

CA

TI

benchmark)
TIO

ES
N

Forecasted Security sensitivity/

scenario analysis
ME
financials
Strategic asset
CO
D IN
allocation
IXE
IE S /F TI
O
N

EQ U I T
UC
S TR
ON
Portfolio weightings
LI OC
TFO
POR

Research level Security level Porfolio level

Source: UN PRI, ‘The ESG Integration Framework,’©82018

October 2018.ALL RIGHTS RESERVED.
CFA INSTITUTE. 5

The above figure illustrates the range of ESG integration techniques applied by investors
across the globe. The FSA Credential intentionally focuses on company research and security
selection and does not delve into detail on portfolio construction.

15.4.2. INDUSTRY ANALYSIS

Industry analysis provides a foundation for understanding growth potential, risks and compet-
itive landscape of an industry. Every industry faces different risks that can threaten value and
opportunities to increase value. For instance, automobile companies tend to have generous
pension plans and a large population of retired pension beneficiaries, whereas that is uncommon
or non-existent for technology companies. An industry framework for automobile companies will
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likely include pension liabilities as a consideration for analyzing and valuing a specific company in
that industry. For a technology company, pension liabilities would likely not influence the compa-
ny’s valuation, and therefore not be useful data to consider in analysis. As ESG integration efforts
grow, industry analysis increasingly includes material sustainability data at the industry level.
Analysts performing industry-level research for active management strategies in public
equities work to understand sector dynamics and the competitive landscape. Analysts require
information about how companies are managing for current and future sustainability-related risks
and opportunities. They also identify changes in market dynamics that may affect a company’s
earnings capacity and assess the impact of legal and regulatory changes in each market.
Sell-side analysts typically provide buy/sell recommendations and stock price targets based
on investment theses and value drivers related to industry-specific dynamics. These targets are
driven by specific valuation methods and models. As the availability, reliability and comparability
of sustainability data improves, it will be easier to include material sustainability information, such
as the information aligned with the IFRS Sustainability Disclosure Standards, into these models.
Industry-specific sustainability topics linked to a company’s financial prospects can comple-
ment or improve typical industry analysis through two main mechanisms:

• illuminating additional risks and opportunities to drive value; and

• providing additional insight into existing value drivers, risk factors and valuation models.
Below is a general example of how the topics that appear in the IFRS Sustainability Disclosure
Standard’s and required guidance (labeled as ‘ESG factors’ in the graphic below) could be
plugged into a traditional industry analytical framework for the automobile industry.

Figure 23—Industry analysis: automobile Industry

Industry drivers and Sustainability Impacts on Value

valuation methods Sustainability topics Drivers
Value drivers • Product safety Revenue growth: Product mix alignment
• Leverage; restructuring • Labor practices with demand for smaller, energy-efficient
• Global markets • Fuel economy and low-emission vehicles is a growth
• Product mix and use-phase driver, with a corollary impact from
emissions switching away from larger, higher-margin
Risk factors • Materials sourcing vehicles.
• Changing gas prices • Materials efficiency
• Demand for alternative and recycling Operating costs and CAPEX: Materials
energy scarcity can lead to higher costs, R&D
• Changing commodity prices and CAPEX for substitution. Sourcing,
• Large unfunded pension materials used and production efficiency
plans can mitigate impact at the firm level.

Valuation methods Option value/scenario analysis:

• Enterprise value/ Risk profile is heightened by large
EBITDAPO for incumbents investments (R&D, CAPEX) in alternative
• Discounted cash flow powertrains (EV/ fuel-cell hybrid) with
and revenue-based ratio uncertain outcomes.
for new entrants or new
markets

Note: ‘PO’ in EBITDAPO above refers to ‘pension obligations,’ which are relevant to only some industries.

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15.4.2.1. Industry analysis: debt vs. equity

The way sustainability information is factored into industry-level analysis may be different for
debt and equity. Perhaps the most significant differences in the use of sustainability data for eval-
uating equities versus debt revolve around time horizons and the importance of risk. While risk
evaluations are an important component of all securities analysis, equity analysis also focuses
on upside investment potential. Unlike equities, debt securities such as bonds and certificates of
deposit (CDs) have a predetermined duration of payment schedules. In other words, they provide
‘fixed income.’ Debt securities (sometimes called fixed-income securities) analysis thus focuses
almost exclusively on evaluating and pricing risk that could prevent the investor from receiving
those predetermined, regular payments.
Fixed income investing typically includes an assessment of four key areas of risk: credit risk,
interest rate risk, yield curve risk, and liquidity risk. ESG integration tends to focus on credit
risk analysis and potential impacts to relevant credit ratios. Although some corporate bond inves-
tors use the same analytical frameworks as their colleagues in public equity, it is increasingly
common for corporate bond investors to integrate sustainability information in a manner that caters
to the specifics of fixed income investing. As a result, they focus their analysis more on risks and
less on opportunities.
For example, fixed-income analysis may focus on climate risk and aim to assess the related
default risk of corporations or municipalities with infrastructure in areas experiencing increased
incidences of extreme weather and natural disasters. Where risk of infrastructure destruction is
high, default risk may also be high. In the future, sustainability might also play a more significant
role in the other three factors—interest rate, yield curve risk, and liquidity risk—if central banks
keep prioritizing ESG-labeled bonds.

15.4.3. FUNDAMENTAL ANALYSIS

Where industry analysis helps investors understand a company’s position and performance
relative to others in an industry, fundamental analysis aims to evaluate the intrinsic value of a
security by examining relevant financial and economic factors. It aims to determine whether a
security is correctly valued. While commonly applied to stocks, it can be applied to any security.
Fundamental analysis relies on financial statements, using measures such as revenues, earnings,
return on equity and profit margins to determine the underlying value and potential future growth
of a business. In fundamental credit analysis for fixed income, key credit ratios are adjusted
for sustainability-related risks and opportunities. Practitioners assess these ratios to understand
whether the creditworthiness of the company is deteriorating or improving, and to evaluate the
potential impact on credit ratings and credit spreads.
Fundamental analysis can involve comparative analysis, which seeks to compare industry
peers against one another, or company valuation, which aims to determine the appropriate value
of a company using various inputs and models. This value may differ from the company’s market
capitalization or the value reflected by its stock price. Sustainability information can be useful to
both techniques.

15.4.3.1. Comparative analysis

Investors and analysts routinely compare companies based on financial fundamentals, such
as price-to-earnings, enterprise multiple and other key ratios. The IFRS Sustainability Disclosure

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Standards, including the SASB Standards, provide similarly useful sustainability-oriented funda-
mentals data. With material financial and sustainability information side by side, investors are
empowered to make more meaningful comparisons between companies and to compare compa-
nies against their own past performance.
Specifically, the information produced using the Standards can help investors identify how
firms are managing their sustainability-related opportunities and risks. This allows analysts to
identify which firms are leaders or laggards today and which firms are poised to become leaders
in the future. Analysts use material sustainability information as indicators of a company’s ability
to respond to emerging risks and demand trends, identify which companies are best leveraging
market opportunities and to analyze the strength of their industry and financial position.253
Analysts also identify and consider operating risks as part of traditional financial analysis.
Sustainability-related risks can negatively affect a company’s operations to the extent that one or
more product lines—or even entire operations—are compromised. For example, new climate-re-
lated regulation and the falling costs of clean energy have led to stranded coal-fired production
assets in some regions. Forward-looking companies that understand and act on the risks through-
out their value chain will be better positioned than their less-proactive peers to mitigate those
risks.254

15.4.3.2. Valuation
The data produced through the IFRS Sustainability Disclosure Standards can be incorporated
into the fundamental analysis of specific firms through discounted cash flow (DCF) analyses and
valuation models at the company and security level. For example, Bank of America’s quantitative
analysis team has found sustainability metrics to be valuable signaling tools, reliably identify-
ing future volatility, earnings declines, stock risk, price declines and bankruptcies when pricing
securities.255 By tracing each sustainability-related risk and opportunity to its effect on financial
prospects, and by providing insight on the likelihood and magnitude of those effects, investors
and analysts effectively factor sustainability-related financial information into company valuations
and cost of capital. More predictable and/or quantifiable factors can be incorporated into earnings
projections, while less measurable factors can be reflected in a discount rate adjustment.
The information produced through the IFRS Sustainability Disclosure Standards can be
used for detailed financial analysis. Because disclosure topics are linked to channels of financial
impact, the associated metrics can be used to analyze current or expected effects on a compa-
ny’s financial position, performance and cash flows. For example, the industry-based guidance
accompanying IFRS S2 identifies Product Innovation as a disclosure topic for the Construction
Materials industry, where ‘consumer and regulatory trends are driving adoption of sustainable
building materials and processes that are more resource efficient and can reduce health impacts
of buildings throughout their lifecycle.’ As a result, a company’s ability to innovate can be linked
to increased revenues, reduced operating costs, and long-term growth and competitiveness.
One metric associated with this topic is the ‘Percentage of products that qualify for credits in
sustainable building design and construction certifications.’ This quantitative metric and related

253 United Nations, ‘Integrated Analysis: How Investors are Addressing Environmental, Social and Governance Factors in Fundamental
Equity Valuation,’ Principles for Responsible Investment, February 2013 .
254 United Nations, ‘Integrated Analysis,’ Principles for Responsible Investment, February 2013
255 Bank of America, ‘ESG: Good Companies Can Make Good Stocks,’ Equity Strategy Focus Point, 18 December 2016.

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disclosures can help an analyst assess a company’s positioning for a growing market in sustain-
able construction materials. The percentage of products that can meet the anticipated market
growth could factor into growth projections for companies in that industry.
Figure 24 outlines how disclosure topics and associated metrics are designed to facilitate
financial analysis.

Figure 24—Metrics support financial analysis

As shown, disclosure topics, which represent sustainability-related risks and opportunities, are
often associated with more than one type of financial impact. In assessing the nature, likelihood
and magnitude of financial effects, analysts may employ a valuation technique, such as discounted
cash flow modeling, using available data related to a given topic. Through this integration, an
analyst is not only able evaluate the extent to which specific risks or opportunities can effect a
company’s cash flows, but also assess differences in possible scenarios.

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Importantly, beyond contributing to the analysis of quantitative financial information, the

IFRS Sustainability Disclosure Standards can support analysis of qualitative fundamentals as
well. Fundamental analysis often considers qualitative factors such as business model, manage-
ment, corporate governance and competitive advantage. As discussed in Section 10.3., the
Standards call for the use of qualitative metrics where quantitative data alone might not present
a complete picture. For example, in the Internet Media & Services Industry, the Standards call
for the disclosure a discussion of the policies and practices a company employed related to
targeted advertising and user privacy, as well as the number of users whose information is used
for secondary purposes, number of law enforcement requests for user information and a variety
of other quantitative metrics.256 Thus, the Standards are designed to yield useful quantitative and
qualitative information that can be used in valuation.

Figure 25—Sustainability-integrated valuation of a hypothetical company

The figure above illustrates one type of analysis used to assess the effects of sustainability-re-
lated risks and opportunities on an individual company’s equity value. This analysis, taken from a
hypothetical company in the Electric Utilities & Power Generators industry, shows the output from a
DCF model that fully integrates ESG performance scenarios. It includes high and a low scenarios,
each of which assumes best and worst-case performance, respectively.

256 SASB Internet Media and Services Standard, Data Security, accessed 2023.

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The model integrates three disclosure topics—GHG Emissions, Water Scarcity and Workforce
Health & Safety—and assesses their potential impacts on share price. Based on the difference
between the company’s current value estimated with sustainability information (blue bar) and
without sustainability information (gray bar), shares may be inaccurately priced. With integrated
sustainability data, the model predicts that the company’s fair market price could increase to
US$38 per share with good sustainability-related performance or could decrease to US$27 per
share with poor sustainability-related performance. The US$11 difference represents uncer-
tainty in share value. Integrating sustainability information into valuation can lead to a vast range
of outcomes depending on the company and industry. In the absence of robust sustainability
disclosure and corresponding analysis, investors and the market forego the opportunity to more
accurately price securities.

The Role of Green Bonds

Unlike corporate bonds and other fixed-income instruments, ‘green’ bonds or ‘climate’ bonds
are typically used to fund projects that have positive environmental or climate-related benefits.

Like their traditional counterparts, they are backed by the issuing entity’s balance sheet and
therefore carry the same credit rating as their issuer’s other debt obligations. However, they
also come with tax incentives and are widely believed to be a means to access low-cost
capital held by institutional investors for green projects. To corporate issuers, green bonds
represent an attractive opportunity to secure a lower rate tied to a sustainability project or
sustainability KPIs.

Voluntary best-practice guidelines such as the Green Bond Principles, established by a

consortium of investment banks have emerged to ensure the integrity of the bonds and avoid
greenwashing.
Sources: World Economic Forum, ‘Public Action and Support Can Attract Private Investment by Reduc-
ing the Cost of Capital of Green Growth,’ accessed October 2020.; Climate Bonds Initiative, ‘Green Bond
Principles and Climate Bonds Standard,’ accessed October 2020.

15.4.3.3. Credit analysis

Asset class and security type shape the focus of fundamental analysis. The sustainability
information most useful to public equity analysis can be different than that in credit analysis, even
when applied to the same company. Relative to credit analysis, public equity investors will base
their decision to buy, sell or hold a stock more on the upside growth potential of a firm, and will
therefore look for equities that maximize upside growth with limited downside risk. When consid-
ering extending credit to the same firm, fixed-income investors will focus more on the company’s
ability to repay debt and interest rather than on upside potential.
The way a company manages sustainability-related risks can affect its creditworthiness.
However, not all debt instruments are the same. Corporate bonds have different durations,
payment schedules and seniority of repayment obligations, among other characteristics. Company
fundaments still play a key role in analysis; however, the investor will be more concerned with the

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company’s financial position and any factors that might inhibit its ability to repay, and will therefore
concentrate on issues that increase downside risk. Credit risk analysis tends to center on default
probability and loss severity. Sustainability information can help an investor assess the severity of
risks facing the firm, particularly the likelihood that poor management of sustainability-related risk
will increase the probability of default.
Research from a team at the Wharton School of the University of Pennsylvania strongly argues
that ‘given the longer-term horizon of creditors and their focus on downside risk, investors when
pricing fixed-income securities should, like investors in equities, take account of the risk mitiga-
tion benefit from higher ESG performance.’257 As referenced in Chapter 1, research from Bank
of America on the protective benefits of integrating sustainability into traditional risk analysis is
compelling. The research found that sustainability information can provide a strong indicator
of bankruptcy avoidance.258 In other words, sustainability information has benefits far beyond
marginal improvements to accuracy: it can be the determining factor in assessing the severity of
risks faced by a target investment.
Fixed income analysis can also necessitate a high level of granularity. For example, consider
a multinational company that has issued bonds backing operations in different regions. The risk
profile of the company at the aggregate level could look very different from the risk profile of an
individual bond, depending on its region and location. Bonds used to finance a mining operation in
Brazil may carry different risks than a similar operation in Australia even when owned by the same
firm. Though the ability to repay presides at the level of the whole company, credit-level sustain-
ability-related risk analysis often requires a greater level of detail than that required for evaluating
equities security valuation to gain a complete understanding of risk.
Sustainability-related risks can be factored into calculations when considering a borrower’s
ability to repay a loan. It can support the evaluation of a firm’s creditworthiness by offering explicit
information on the company’s approach to managing sustainability-related risks, or by integrating
sustainability data into existing credit risk assessments. For example, SASB Standards enabled
Payden & Rygel to complement its traditional ESG analysis in the credit research of a specific
company based in Brazil—a region with relatively unreliable third-party sustainability data—by
honing in on the most relevant sustainability-related risks and opportunities at the industry and
company level. More specifically, Payden & Rygel surfaced data related to the critical issues of
supply chain and food management for a large McDonald’s franchisee—including nutritional
content, and fair labor practices—ultimately gaining confidence in the target company’s ability to
repay debt. In this way, industry-specific, material sustainability information can support improved
company-level financial analysis for fixed-income investments.

15.4.3.4.Deal sourcing and due diligence in private equity

Due diligence is an integral component of private equity analysis. Just as investors in pubic
markets increasingly look beyond traditional financial statements to better understand a compa-
ny’s ability to create value over the long term, private markets investors look to sustainability
information to develop a more complete picture of a fund’s or portfolio company’s full potential.
Private markets’ deal teams conducting due diligence can bolster their analysis with sustainability

257 Witold J. Henisz and James McGlinch, ‘ESG, Material Credit Events, and Credit Risk,’ Journal of Applied Corporate Finance 31, no. 2
(Spring 2019).
258 Bank of America, ‘Equity Strategy Focus Point: ESG Part III—a Deeper Dive,’ 15 June 2018.

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information in a number of ways. Common approaches include:

• determining which sustainability-related risks and opportunities are reasonably likely to
affect a company’s financial position and performance, and thus merit assessment during
due diligence;
• develop regulatory awareness through engagement on industry-specific sustainability
matters, which have the potential for creating costs or opportunities for companies; and
• use questionnaires, score cards or other proprietary tools to evaluate a portfolio compa-
ny’s sustainability policies and procedures.
Regardless of the precise investment strategy, sustainability information gathered during due
diligence can inform not only the investment decision itself but also post-investment action plans.
For example, Generation Investment Management (Generation), a London-based private
markets investment firm, applies SASB Standards to pre-investment research, post-investment
monitoring and measurement and ongoing engagement with the goal of adding portfolio value.
Specifically, Generation applies uses the Standards to identify and assess a sustainability-related
risks and opportunities during pre-investment research. Topic identification helps the firm assess
operations and management, set ‘sustainability thresholds’ using specific metrics and provide
investee support by helping establish best practices for integrated sustainability measurement
and reporting (both internal and external). Ultimately, Generation can generate returns directly as
sustainability topics are identified and managed, and indirectly as companies grow.259
Sustainability information can also support due diligence beyond individual company assess-
ment. It can support deal teams in conducting sector-based assessments of risk and opportunity
that can help inform fund strategy. It can also help investors consider cross-cutting sustain-
ability-related risks and how they might affect a firm’s portfolio-level exposure to these risks.
Disclosures produced using the IFRS Sustainability Disclosure Standards can provide the data
inputs needed to operationalize ESG integration in sourcing and due diligence, and thus provide
investors with a clearer understanding of sustainability-related risks and opportunities that can
affect valuation and a firm’s growth potential.

15.5 INDEX CONSTRUCTION AND SECTOR ALLOCATION

The pre-investment activities discussed above apply to active management of fixed-income
and equity investments in public and private markets. However, in index construction-based
investing, a largely ‘passive’ strategy, the use of sustainability information looks different.
An index fund is a mutual fund or exchange-traded fund constructed to match the perfor-
mance components of a market index, such as the S&P Global 1200 or EURO STOXX 50. They
offer a low-cost way for investors to track popular stock and bond market indices while achieving
broad diversification.
Indices are rules based. They do not involve in-depth analysis of individual companies. Rather,
index investors develop a formula that can be applied to companies at scale. Index investment
analysis therefore requires limited to no human intervention, making the availability of comparable,
consistent and reliable data all the more critical. Otherwise, it is ‘garbage in, garbage out.’ When

259 SASB, Integrating ESG Holistically In Private Equity: A Strategic Approach, October 2020, p.31.

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it comes to factoring sustainability information into index construction activities, good data adds
value in a variety of ways.

15.5.1. SUSTAINABILITY DATA IN INDEX FUNDS

Although all investors rely on data that is comparable, consistent and reliable, the market
for such data can play into the competitive advantage (or disadvantage) of certain investment
approaches. For example, active public and private markets investors recognize that having
access to more or better information than their competitors (without violating fair disclosure laws
designed to protect fairness in public markets) can give them a better chance of beating the
market. In instances where data is broadly disclosed but is not comparable, a firm that develops
a way to analyze the data effectively can gain a competitive advantage.
Index fund managers, on the other hand, analyze hundreds or even thousands of companies
simultaneously. Though index investing is largely passive, it involves a few important active deci-
sions. Index strategies require active security selection during index construction (though index
construction is conducted only by index providers) and, more commonly, active index selection
during portfolio construction. ESG and sustainability indices also require investors to actively set
benchmarks and to consider risk appetite and volatility limits related to sustainability matters, such
as ‘the trade-off between incorporating climate scenarios and taking account of risk appetite or
volatility limits.’260
Some indices are designed to provide exposure to positive sustainability-related opportuni-
ties, or investment characteristics related to sustainability that produce positive results. In these
cases, sustainability information is used to generate a tilt. Traditionally, a tilt fund includes a core
holding of stocks selected for their combined ability to mimic a benchmark index such as the S&P
500. Securities are then added to the fund to ‘tilt’ it toward enhanced performance. When an ‘ESG
tilt’ is applied to index construction, assets are weighted according to sustainability performance
characteristics, either ‘away’ from undesired characteristics, such as high carbon emissions, or
‘toward’ desirable characteristics.
Financial information is already embedded in indices in that they are market-cap weighted.
In the case of sustainability-specific indices, the weight of each company is adjusted based on
sustainability information. For example, S&P offers an ESG Index family that values stocks using
ESG scores and corporate sustainability assessments (among other information), allowing inves-
tors to integrate sustainability matters into core investments without straying too far from the overall
profile of S&P broad market indices.261
Indices can also be designed to utilize either negative screens, positive screens or momen-
tum-based approaches. As the name implies, screens applies to indices involve selecting a set of
criteria, applying it to assets under consideration, and screening out assets based on their ability
(or inability) to meet that criteria. For example, screens are applied to track an underlying index
while also limiting exposure to carbon intensive industries, either by screening out high emitters
or overweighting companies with low carbon exposure.
Indices can incorporate both tilts and screens to index construction and re-weighting activi-
ties. An index might tilt toward companies with positive sustainability-related characteristics, while

260 UN PRI, ‘ESG and Passive Investment Strategies Consultation Results,’ 2020.
261 SAM, ‘S&P ESG Index Family,’ accessed October 2020.

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also applying limited values-based or norms-based screens, such as eliminating tobacco compa-
nies or those scoring poorly based on non-compliance with the UN Global Compact principles.
For example, Vanguard’s ESG US Stock ETF (ESGV) seeks to track the performance of the FTSE
US All Cap Choice Index and specifically excludes stocks of companies in the alcohol, tobacco,
weapons, fossil fuels and gambling industries.262

15.5.1.1. Sector allocation

Sustainability information can also inform sector allocation, where sectors could become more
or less correlated with one another depending on sustainability risks and opportunities. Calculating
a portfolio’s diversification, overall expected return rate and risk exposure based on sector expo-
sure to material sector-specific sustainability topics can help investors meet risk-return targets
through diversification.
For example, climate change affects the vast majority of industries. It cannot be managed
via divestment, nor can tracking a single factor, like greenhouse gas emissions, provide action-
able data across portfolios. Instead, improving understanding of the industry-specific impacts of
climate change on risk and return—and managing allocations accordingly—is a more effective
way mitigate climate risk exposure.
For instance, climate change is likely to increase costs for companies in the Insurance indus-
try because of increased claims related to extreme weather events, which are intermittent and
unpredictable. Meanwhile, companies in Oil & Gas industries face reduced revenues because of
climate-change-related regulation and shifts in global demand, which are fundamental and more
predictable. Climate risk is a systemic risk, not to be confused with the systematic or market
risk inherent in owning equities.
Classifying industries based on sustainability characteristics can help investors reduce
systemic risk across a portfolio. One element of assessing—and mitigating—systemic risk involves
analyzing the correlation between different sectors. If the financial returns of one sector are heavily
correlated with those of another, the potential for systemic risk increases. Grouping sectors based
on financial characteristics—as is done within the Global Industry Classification System (GICS)—
provides one lens to assess correlation. A sustainability-based industry classification, such as
the Sustainable Industry Classification (SICS), provides another lens to assess correlation. A Yale
University study combined the two classification systems to improve systemic risk assessment
and reduce correlation. In the study, the 11 GICS sectors were combined with the 10 sectors in
SASB’s provisional version of SICS, creating 110 potential sectors into which a company could be
classified (though many sectors did not include any companies; realistically there were 30 to 40
final sectors). The research found that 95% of sectors experienced reduced correlation across
both small and large caps. The average magnitude of the reduced correlation was 51%. This study
shows that sustainability information can improve investment analysis not only at a company or a
security level but also at a sector level.263 With such a meaningful reduction in correlation, investors
gain an additional tool for mitigating systemic risk.
The IFRS Sustainability Disclosure Standards provide an additional level of detail related
to industry-specific sustainability-related risks and opportunities, enabling investors to make

262 Vanguard ESG US Stock ETF (ESGV), accessed October 2020.

263 Decio Nascimento and Shivani Payal, ‘Industry Classification and Environmental, Social and Governance (ESG) Standards,’ Yale
University, Initiative on Sustainable Finance Symposium, November 2, 2018.

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better-informed portfolio-weighting decisions that can lead to reduced portfolio risk (i.e., lower
volatility) and greater diversification benefits (i.e., higher risk-adjusted return) over the long run.

15.6. POST-INVESTMENT ENGAGEMENT

By integrating material sustainability information into pre-investment processes, investors
may surface insights that support decisions to either avoid risks by avoiding an investment or to
invest where upside gains are expected to compensate for potential risks. For example, in corpo-
rate debt, avoiding a major risk may mean avoiding bankruptcy. In equities, exclusionary screens
can avoid the lowest performers or those involved in controversies that may lead to major losses.
However, sometimes equity investors assess an investment opportunity where sustainability-re-
lated risks are present but are not serious enough to forego the investment opportunity or sell. In
these cases, investors may choose to work with the target company post-investment to reduce
the identified risks, thus adding value to both the company and the investor. Though some of the
earliest examples of using sustainability information in the investment process stem from divest-
ment campaigns in the 1970s (and similar campaigns that exist today), many investors believe they
can have a more productive impact on an investment’s performance by investing and engaging
rather than divesting. Stewardship and engagement activities aim to safeguard or improve port-
folio company performance.

15.6.1. ACTIVE OWNERSHIP

Investors can use sustainability disclosures to understand how the companies they hold
manage sustainability-related risks and opportunities. They can also see how other companies
manage these same risks and opportunities and compare performance within industries. They
can use this information when preparing to engage with corporations and when discussing future
goals.
In lieu of disclosures, investors use the disclosure topics within the SASB Standards, and
now the IFRS Sustainability Disclosure Standards, as a playbook for engaging companies on
the sustainability matters relevant to its ability to generate returns and to encourage improved
disclosure of sustainability information. Many licensees use the Standards to apply a sustainabil-
ity lens to third-party data to inform engagement discussions and improve their ability to craft an
informed investment strategy. Others leverage Engagement Guide for Asset Owners and Asset
Managers for industry-specific engagement guidance.264 Requests for disclosure also support
active engagement. For example, in 2015 Harvard Management Company, which manages an
endowment valued at more than US$35 billion, requested that the energy sector companies it
holds in its portfolio incorporate SASB Standards into their public disclosures. This information
improves Harvard Management Company’s ability to craft an informed investment strategy.265
There are many ways to engage in active ownership in public equity, from meetings with
management and other engagement activities to proxy voting and filing shareholder resolutions.
The use of material sustainability information in such engagement activities can help to promote
effective management of sustainability-related risks and opportunities and support overall improve-
ment of the risk-return profile of the company. Each of these activities has distinct characteristics

264 SASB, ‘Engagement Guide SASB Connects Businesses and Investors on the Financial Impacts of Sustainability for Asset Owners
and Asset Managers,’ June 2023.
265 Harvard Management Company website, ‘Investing for the Long Term: Integrating ESG Factors,’ Accessed October 2020.

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that asset managers and asset owners can leverage to steward investments and contribute to
improved performance.

15.6.2. MONITORING AND ENGAGEMENT

Traditionally, active investors and index fund managers partake in a cycle of monitoring and
reporting. They monitor holdings for adherence to best practices and performance on certain
financial metrics. They also engage with companies to influence company-level decision-making.
More and more, investors integrate sustainability information into this cycle. It is important to note,
however, that the level of investor-investee engagement is in part a function of asset class, as well
as the size and scope of investor holdings.
An index investor holding thousands of diversified companies across sectors and regions, for
example, will be able to meaningfully engage with only a small number of investees, and there-
fore might establish a framework to define where engagement efforts should be focused. Such
prioritization might consider the size of the holding (the largest would pose the biggest risk to port-
folio performance), the exposure to sustainability-related risks and opportunities, the potential of
bottom and top-decile performers, or other factors.266 The data yielded by the IFRS Sustainability
Disclosure Standards, including the SASB Standards, can help public equity investors prioritize
companies and topics for engagement and inform resulting dialogues.
During pre-investment research and due diligence, investors with more concentrated holdings
may identify specific sustainability-related risks or opportunities faced by a portfolio or company
and seek to manage performance on those risks and opportunities during the ownership period.
Beyond the metrics and thresholds assessed during due diligence, investors can establish a set

Example: Engaging for Food Waste Reduction

Partners Group (PG), a private equity investment management firm, previously held a
majority stake in Vermaat, a Dutch premium hospitality provider that operates close to
400 food and beverage locations. Its core customer segments include hospitals, leisure,
corporate, travel and events. The company employs more than 4,100 people.

In line with Vermaat’s 2022 Food Vision Program, which includes targets for health,
sustainability and social responsibility, PG worked with Vermaat throughout ownership to
effectively reduce food waste. The targets not only support supply-chain-efficiency im-
provements but also help achieve the environmental goals of reduced waste and carbon
emissions and align with Sustainable Development Goal 12.3. which is related to reducing
global food waste.

After examining Vermaat’s supply chain, PG introduced a process focused on ingredient

production, planning, cooking and point of sale, thus optimizing resource utilization and
helping put Vermaat on track to meet its target food-waste-reduction rate of 10% annually.
Source: Partners Group, ‘Progress report: Responsible investment,’ 2019, p. 28.

266 PRI, ‘Engagement and Voting Practices,’ 28 February 2018.

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of KPIs for specific sustainability topics, collect baseline data and set targets for improvement at
both the portfolio and asset level. In other words, in the earliest stages of analysis, it is important
for an investor to understand where companies are and how their performance compares to that
of their peers. Areas of improvement can then be identified, and targets for improvement can be
set, thus allowing investors to have informed dialogues with management.
For private equity investors, who may take a majority-control stake, have fewer holdings overall,
have longer investment horizons and typically need to find alignment with a smaller investor base,
engagement can be more frequent and robust. Private equity funds can contribute significantly
to the performance of the firms in which they invest—through a strong emphasis on steward-
ship, and close contact between the general partner (GP) and company management, expertise,
connections and other transformative resources—beyond the provision of capital. Sustainability
information can be tremendously additive in closer, more involved private equity engagements as
well. It is important to note, however, that while the opportunity to engage is there, PE firms do not
always pursue close engagements.
In fixed income investing, engagement activities have been traditionally non-existent. Fixed
income comes with the clear expectation that companies meet their payment obligations. A
company’s management of sustainability-related risks and opportunities can affect those returns,
and investors can request sustainability disclosure. However, as long as the payment obliga-
tion is met, investors typically do not have the leverage to request additional performance goals
related to sustainability or otherwise. However, a growing number of investors engage with fixed
income holdings to at least some extent. In fact, a PRI survey found that 66% of signatories
with fixed income investments engage with at least one company.267 Sustainability information
supports initial risk analysis, and issuers may commit to voluntary monitoring and reporting related
to sustainability. Fixed income fund managers have been engaging with companies to encourage
improved sustainability disclosure and to augment their credit analysis with material sustainability
information.
The IFRS Sustainability Disclosure Standards, including the SASB Standards and sources of
guidance, provide metrics using verifiable data applicable to most companies in an industry. Just
as the data produced using the Standards supports operationalization of sustainability information
in sourcing and due diligence, it can also enable benchmarking, monitoring and target-setting.
The Standards are also designed to yield qualitative data to provide vital context and improve the
decision-usefulness of sustainability information. Combined, this information can enhance tradi-
tional hold-period engagements across asset classes and holding sizes.

15.6.3. PROXY VOTING AND RESOLUTIONS

Shareholders of publicly-traded companies are entitled to vote by proxy on the issues that
affect company’s performance and governance practices as well as crucial topics relevant to
shareholder value. While most investors concerned with sustainability prefer management
dialogues, some investors and asset managers use proxy votes to press for better governance of
sustainability-related risks and opportunities when engagement does not yield desired improve-
ments. Investors can use their votes on individual ballot items to strengthen corporate governance
of emerging risks by voting for specific board members to shape board oversight, incentive
structures, transparency and company policies. Notably, investors concerned about certain

267 PRI, ‘ESG Engagement for Fixed Income Investors,’ 2018.

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sustainability-related risks might put forward requests for greater transparency and stronger poli-
cies to gain insight into how companies oversee and address these risks.
Indeed, a 2020 analysis of S&P 100 proxy statements found that 70% of proxy ballots
highlighted sustainability and governance developments along with other business items—an
indication that listed companies are increasingly responding to investor demand for sustainabil-
ity information in proxy statements, even from investors with relatively fewer shares. Some asset
managers additionally integrate sustainability information into voting policies in a norms-based
manner.

15.7. INVESTOR REPORTING

While the quality, relevance and decision-usefulness of sustainability information starts at
the company level, investors are also responsible for reporting key information to clients and
stakeholders via client reports, client-facing portfolio analytics and public statements. Investors
are accountable for meeting client demand for understandable data (sustainability and tradi-
tional) about the performance and outlook of their investment strategy. This is often a challenging
endeavor, given the complexity of data included in assessing positions, valuations, risk and perfor-
mance. Further, client interests and requests can vary.
Some investment management firms provide summary data on a client portfolio’s sustainabil-
ity-related characteristics and individual positions by integrating data from ESG rating agencies
and communicating them through client-facing channels. For example, a firm may offer two
benchmarks—a typical market-capitalized benchmark and a sustainability benchmark—and a
view their respective performance side by side in addition to portfolio performance updates as
a whole. Other firms, recognizing that integrating sustainability information into investment deci-
sions improves the selection process and enhances risk-adjusted returns, believe that sustainable
investing should be (and often is) judged only against common non-ESG benchmarks such as the
S&P 500 or Russell 1000 Growth. 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 through relative comparison.
In private equity, however, sustainability in GP reporting and limited partner (LP) monitoring
and reporting is quickly becoming an integral component of pre-investment decision-making and
fund management. PRI, for example, recommends in its ‘ESG Monitoring, Reporting and Dialogue
in Private Equity’ guidance that, prior to making a fund commitment, LPs formally confirm the
sustainability information GPs agree to provide, and how that information may align with more
traditional information currently being shared. Through LP’s responsibility to stay informed of the
practices of their investment manager and GP’s responsibility to disclose information throughout
the life of a private equity fund, sustainability information in GP and LP reporting can enhance
understanding of the sustainability-related risks and opportunities that are reasonably likely to
affect the cash flows, access to finance or cost of capital, and thus inform monitoring and asset
management to better protect and enhance the value of the portfolio company.
Beyond investee engagement, many asset owners are also incorporating IFRS Sustainability
Disclosure resources into the evaluation and monitoring of their external asset managers. Asset
owners are developing increasingly sophisticated tools to evaluate asset managers’ ability to inte-
grate sustainability information across the investment process.
For example, in evaluating ESG integration across externally-managed public equity portfolios,

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Wespath Investment Management used SASB Standards to develop an appraisal tool within its
annual manager evaluation process. This tool enables Wespath to generate a snapshot of an
asset manager’s performance across investment stages and to identify leaders and laggards with
clear indications on areas of excellence as well as areas in need of improvement. This illustrates
the growing demand from asset owners that asset managers authentically integrate sustainability
considerations into their investment decision-making.
Source: Wespath Investment Management, SASB ESG Integration Insights: Investors in Their
Own Words, ‘Using SASB for Manager Evaluation and Monitoring,’ 2016.

15.8. CREATING AN EFFECTIVE FRAMEWORK

Regardless of an investor’s existing processes, priorities and goals, the IFRS Sustainability
Disclosure Standards, including the SASB Standards and sources of guidance, make it possi-
ble for investors to create a coherent framework to use material sustainability information across
stages of the investment process, including:
determining what data to use;
evaluating investment opportunities and building portfolios;
stewarding investments, engaging with companies and proxy voting; and
reporting to clients and stakeholders.
In determining what data to use, the focus on material, industry-specific sustainability factors
can help investors start with the information that is most likely to impact the value of potential
investments. Throughout pre-investment analysis, the insights gained from disclosures can help
to operationalize the integration of sustainability information and facilitate the analysis of at both
the company and portfolio levels. They offer the information infrastructure to ensure sustainability
data is consistently and effectively applied across the investment process. In investee engage-
ment, the Standards can provide a roadmap for requesting specific sustainability information, as
well a framework to set targets and support the management of the sustainability-related risks and
opportunities that could reasonably affect a company’s financial position, financial performance
and cash flows. Finally, the Standards can support integrated stakeholder and client reporting,
where investors are able to communicate how they are integrating sustainability information into
the investment process and examine the implications of identified sustainability-related risks and
opportunities.

15.9. DATA IS THE BACKBONE

When available, integration of high-quality, material, comparable, and consistent sustainability
data has the power to improve each stage of the investment process. Without this data, research
is often less accurate and more difficult. With high-quality data inputs, pre-investment analysis
and post-investment stewardship can be more effective.

15.9.1. EXISTING CHALLENGES

Integration of consistent, comparable, reliable sustainability information into pre-investment,
post-investment and investor reporting yields benefits across asset classes and investing strate-
gies, improving the efficacy of investment decisions and engagements and contributing to broader

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market efficiency and price discovery. However, current sustainability disclosure practices to date
have been imperfect and come with a wide range of challenges.

15.9.1.1. Policies, not performance

While there has been an accelerating trend of increased disclosure of sustainability infor-
mation, much of the information disclosed has not been decision-useful. Many firms report
policy-based information, which is binary. For example, in the Financials sector, an asset manage-
ment firm may disclose its whistleblower policy. While such policies may very well represent
important initiatives for the firm, when seeking to use this information for investment analysis, the
presence of policies is represented by a simple ‘yes-no’ or ‘0-1’ binary, indicating that the company
either does or does not have such a policy. Such policies may even provide important account-
ability information by specifying the roles and departments directly responsible for overseeing the
policy. To investors, nonbinary metrics that can be compared against peers or tracked against
past performance can be far more useful. Rather than disclosing the presence of a whistleblower
policy, a firm may disclose the total amount of monetary losses that result from legal proceedings
associated with fraud, insider trading, anti-trust, anti-competitive behavior, market manipulation,
malpractice or other related financial industry laws or regulations, accompanied by a description
of whistleblower policies and procedures.
Unfortunately, a very low percentage of disclosed sustainability-related metrics provided
by companies reflect actual performance. According to one analysis conducted by Goldman
Sachs, only 11.6% of disclosed environmental and social metrics constitute performance data.
Furthermore, only one of the 25 most disclosed pieces of sustainability information—GHG emis-
sions—is quantitative, and it is the lowest on the list of commonly disclosed metrics. In this sense,
data problems can exist where companies disclose policies, not performance.

15.9.1.2. Quantitative data is not always comparable

Even when companies do provide good-faith efforts to disclose quantitative data, it does
not always result in comparability across companies. In fact, ‘Inconsistency in the way different
companies report ESG data is a commonly cited challenge when trying to analyze the effects
of ESG investment and performance.’ In a study published in the Journal of Applied Corporate
Finance, a random sample of 50 Fortune 500 companies were analyzed for their disclosure of
employee health and safety data in their sustainability reports. The study found data reported on
the same topic in more than 20 different ways, ‘using different terminology and, most importantly,
different units of measure.’
Without standards, companies use an array of metrics to report on the same thing. Variation
across units of measurement and, in some cases, lack of clear measurement methodology,
reduces the comparability of metrics and limits their usefulness to investors.

15.9.1.3. A range of scoring methods

As briefly discussed in Chapters 5 and 14, ESG ratings developed by third parties are widely
used among company management teams and investors as a source of quantitative performance
data that provides comparability and benchmarking.
Financial information providers such as Refinitiv and MSCI make it easier for analysts to create
and maintain centralized research dashboards where traditional financial data can be analyzed

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concurrently with sustainability data. Many institutional investors and asset owners rely on third-
party ratings and analytics to supplement in-house assessment procedures. However, investors
may run into problems where sustainability data is not available for smaller, non-core index names.
In some cases, institutional investors and large asset managers have developed their own propri-
etary database and ranking systems. For example, Goldman Sachs developed its GS Sustain
framework to guide the long-term investment strategy of its Global Investment Research Division.
One key criterion of the strategy is assessing the management quality of companies with respect
to sustainability issues.
Even as integration activities evolve to support comparative analysis, aggregate sustainability
data itself faces challenges. For example, studies have found that ESG ratings exhibit very low
correlation to one another. Research published by MIT Sloan School of Management found that
correlation among ESG ratings was 0.61 on average. By comparison, credit ratings from Moody’s
and S&P are correlated at 0.99. Such low correlation can be partially attributed to different meth-
odologies between providers. For example, both MSCI and Sustainalytics seek to assess the
performance of companies based on ESG risk exposure and the company’s ability to manage
sustainability-related risks. MSCI ESG ratings are industry-relative, meaning ratings indicate if a
company’s performance is leading or lagging relative to industry peers. Sustainalytics scores are
absolute, ‘grading’ companies on a scale of 0 to 100. The discrepancy in scoring among provid-
ers has market consequences. Stock and bond prices are unlikely to properly reflect companies’
actual ability to manage sustainability-related risks and opportunities. The abundance of ESG
ratings and methodologies can lead to a false sense of confidence in the data landscape. The lack
of comparable, quantitative sustainability data inhibits decision-usefulness and price discovery.

15.9.1.4. Sustainability disclosure is often not comprehensive

Comprehensive disclosure from companies is a function of data availability. As a relatively
new and, in many cases, voluntary practice (though mandatory disclosure is becoming more
prominent), sustainability disclosure often lacks rigorous internal data communication channels
and systems of control when compared with well-established reporting practices developed to
comply with standards for financial statements. As a result, quality sustainability disclosure does
not always encompass a company’s full operations. It may cover only certain segments, where
sustainability information is reported when available from business units, rather than from the entire
scope of operations of the parent company. In some cases, companies will make it clear to report
users that certain data does not cover the full entity. In other reports, the completeness of data
may not be as easily discernable.
Companies may find that their disclosure is initially limited to the data that is easiest to capture.
GHG emissions, for example, are among the most reported pieces of sustainability information
in part because previous regulations calling for greenhouse gas emissions disclosure helped
create a mature global discipline of measuring and reporting these metrics. Thankfully, compa-
nies are not left to identify which information to disclose on their own. The IFRS Sustainability
Disclosure Standards as well as other sources of guidance in the market help facilitate more
complete disclosures.

15.9.1.5. Sustainability information is not always reliable

The reliability of sustainability information is vital to investors’ ability to integrate that informa-
tion into decision-making processes. Many investors have observed that ‘companies do not have

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the systems in place to collect quality data for [sustainability] reporting.’ As discussed in Section
14.3., the reliability of sustainability information and business performance information as a whole
is a function of internal controls, board governance and assurance. However, as sustainability
disclosure is a relatively young practice within many companies, sustainability data is not always
integrated into internal systems of control or ‘lines of defense’, creating challenges where current
checks and balances may need to be adjusted or expanded to improve the rigor and quality of
sustainability data. Investors, however, increasingly expect sustainability disclosures to be just
as reliable as financial statements in order to gain a better understanding of how the business is
mitigating those risks and opportunities relevant to the organization’s success in the long term.
The more mature and transparent a company’s system for internal controls, board governance,
and external assurance of sustainability information, the greater investor confidence will be in
using the information.

15.9.1.6. Never-ending demands for more information

The availability of standardized financial information previously enabled the development
of investment strategies such as quantitative investing and factor investing. It also supported
foundational models such as the capital asset pricing model and other multi-factor modeling.
As consistency, reliability and comparability of information increased, so did the advancement
of investment strategies. The historical development of standardized financial data represents a
primary goal of standardized sustainability data today—one that fuels market efficiency and price
discovery in increasingly innovative ways. Indeed, sustainability information is becoming more
accurate and comparable, but the current data landscape is far from perfect.
While significant progress has been made, the fragmentation of sustainability disclosure can
still contribute to seemingly never-ending demands from investors for more information. Investors
continue to demand more and better data and are faced with the challenge of using a wide
array of sustainability reports, documents, filings and websites. Efficient communication between
companies and their investors can thus contribute to efficiency of markets.
The development of standards for financial disclosure yielded standardized financial informa-
tion across markets, which, in turn, enabled the development of more sophisticated investment
analysis and strategies. Quantitative investing, factor investing and foundational models such as
the capital asset pricing model thrive as a result of standardized data.
While the ESG integration has been characterized by increasingly diverse and sophisticated
applications of sustainability information, poor disclosure has contributed to an array of problems
that have made investor decision-making more difficult. The cyclical nature of security owner-
ship, periodic reporting and security sale requires a strong foundation of information and built-in
processes of continual improvement. If the availability and usefulness of information is not improv-
ing throughout the buy, hold and sell period, then the market is not able to price securities as
efficiently or accurately as it could. Sustainability disclosure standards can help mitigate these
challenges by aligning companies and investors on the sustainability-related risks and opportu-
nities that can affect investment outcomes. The disclosure of material information related to those
risks and opportunities can help improve corporate management and business success while also
helping improve investment decision-making across markets.

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CHAPTER REVIEW
This chapter contains information related to the following Learning Objective(s):
17 IDENTIFY how sustainability information is used in public equities (active and
passive)

18 IDENTIFY how sustainability information is used in corporate fixed income.

19 IDENTIFY how sustainability information is used in private markets.

20 IDENTIFY the challenges investors face in using sustainability information and

how those challenges impact the market.

? CHECK YOUR UNDERSTANDING

1.  ow does investor-focused sustainability disclosure help meet the needs of different
H
types of investors?

2. H
 ow is the use of sustainability information in corporate fixed-income different from the
use of sustainability information in public equity? How is this similar to or different from
the use of sustainability information in private equity?

3. How do existing data challenges inhibit investors’ ability to use sustainability data?

JUMP TO ANSWERS

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FSA CREDENTIAL LEVEL I STUDY GUIDE CONCLUSION

CONCLUSION

The emergence of sustainability-related financial disclosure is part of the natural evolution of

capital markets. Sustainability-related risks and opportunities can affect companies’ cash flows,
access to finance and cost of capital over the short, medium, or long term. In recent years, the
fragmentation of sustainability disclosure has created significant challenges for companies, inves-
tors and capital markets as a whole. However, the history of financial disclosure demonstrates
that these challenges are neither novel nor insurmountable. Indeed, the consolidation of multiple
sustainability disclosure standards and frameworks to create the ISSB and the global trend toward
mandatory sustainability disclosure marks significant progress toward creating a consistent, global
baseline of investor-focused sustainability information.

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FSA CREDENTIAL LEVEL I STUDY GUIDE PREPARING FOR THE EXAM

PREPARING
FOR THE EXAM

The preceding pages contain all the material needed to fulfill each Learning Objective and
prepare for the exam. Exam questions have been written by a panel of subject matter experts
to assess mastery of the Learning Objectives listed at the beginning of and throughout this
document. The best way to prepare for the exam is to ensure that you can fulfill each Learning
Objective. The Learning Objectives use verbs such as ‘identify,’ ‘recall,’ and ‘compare’ to indicate
how material related to each Learning Objective will be tested, and to specify the extent to which
you should feel comfortable with the associated content.
‘Check your understanding’ questions listed at the end of each chapter are designed to probe
key takeaways but do not reflect the type of questions you will be asked on the exam. Note that
while the study guide includes many statistics, dates, data points, definitions and examples, the
exam is designed to test your conceptual understanding more than the memorization of those
types of details. The blue ‘call out boxes’ and glossary of key terms are included to support learn-
ing but do not represent testable information.
Sample exam questions—reflective of the type of questions found on the exam— will be made
available prior the beginning of the first testing block of the year. The FSA Credential Level I exam
consists of 110 multiple choice questions. Candidates have two hours (120 minutes) to complete
the exam. Your pass/fail status will be provided immediately upon completion.
For more information about the exam, including how to register, accommodations information
and what to expect on test day, please download the Candidate Handbook available on ifrs.org.

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FSA CREDENTIAL LEVEL I STUDY GUIDE CHECK YOUR UNDERSTANDING EXPLANATIONS

CHECK YOUR
UNDERSTANDING:
CHAPTER EXPLANATIONS

The explanations below correspond directly to the questions that appear at the end of each
chapter. These questions do not reflect the type of questions that appear in the exam. They are
intended to be used as ‘checkpoints’ for candidates to review and evaluate comprehension of key
topics.

CHAPTER 1

1. Why do investors demand quality sustainability information?

Investors express demand for and source quality sustainability information to meet their invest-
ment goals. While investors are generally defined as people or organizations that allocate financial
capital with the goal of achieving a profit, not all investors are the same. Investment goals and
accompanying strategies may include using the information to achieve above-market returns,
assessing risk to protect against diminished returns and major losses, or evaluating the predictabil-
ity of investment outcomes. Whether operating in public or private markets, the ability of investors
to use sustainability information to achieve enhanced outcomes is evidenced by an increasingly
robust body of independent research.

2. What factors drive demand for quality sustainability information within companies?
Sustainability data, both qualitative and quantitative, can contribute to company success in
the near, medium and long term by improving the management of sustainability-related risks and
opportunities. Where sustainability-related risks and opportunities are measured and managed,
companies may be better equipped to identify and mitigate risks, reduce costs, optimize efficien-
cies and even increase market share and revenue growth through new products and services.
Indeed, by demonstrating an ability to manage sustainability-related risks and opportunities to
bolster company performance, companies can leverage sustainability disclosure to effectively
communicate with investors and improve cost of capital. Simply put, demand for sustainability
information within companies is often (though not always) driven by the goal of improving bottom-
line performance.

3. Besides companies and their investors, what other institutions influence demand for
sustainability information across capital markets?
The performance benefits that investors and companies experience when integrating sustain-
ability information into their decision-making processes are not the only factors driving demand
for sustainability information. Other organizations, both public and private, influence the global

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sustainability dialogue. International, national and local policy-based initiatives stimulate sustain-
ability disclosure by passing recommendations and guidance, as well as regulatory requirements,
for the disclosure of sustainability information from publicly listed companies. Non-policy efforts,
particularly those initiated by securities exchanges and industry associations, increasingly encour-
age sustainability disclosure among listees and members.

CHAPTER 2

1. Why was disclosure the basis of regulatory reform in the wake of the 1929 stock
market crash?
The stock market crash of 1929 sent shockwaves throughout global markets, leading to global
economic declines and the onset of the Great Depression in the United States. The event provides
perhaps the most striking example of how lack of transparency in capital markets can have disas-
trous consequences—harming socioeconomic wellbeing, bankrupting companies and eroding
investors’ confidence in the information they rely on from companies to make investment deci-
sions. Disclosure was the basis of regulatory reform in this defining period because disclosure is
a means to promote transparency, and transparency is essential to fostering sound and efficient
capital markets. As evidenced by the formation of the first securities regulators, mandatory and
standardized corporate disclosure is an effective mechanism to protect the investing public and
positively influence corporate behavior.

2. How has the purpose of accounting changed since the 1930s, and why did financial
reporting move toward standardization?
In early years, accounting practices primarily focused on accurate recordkeeping via historical
cost accounting. This founding purpose shaped the accounting profession, where accuracy and
reliable record keeping are paramount. However, to serve their own unique goals, firms began
accounting and reporting financial information using a range of methodologies, ultimately inhibiting
the comparability of financial statements. This fragmentation of accounting practices necessitated
a push by accounting associations to come to a consensus regarding the true purpose of account-
ing and to promote standardization. The profession ultimately determined that accounting exists to
provide information for the purpose of making economic decisions, which can include both histori-
cal records and forward-looking information. High levels of adoption of standards such as the IFRS
Accounting Standards and US GAAP allow investors around the world to efficiently source and
use the information produced using those standards. With higher levels of standardized disclosure
comes more consistent, comparable, and reliable information across markets, allowing investors
to assess and compare companies’ financial position, financial performance and prospects.

CHAPTER 3

1. Why did materiality emerge in early regulations governing financial reporting? What
purpose does it serve?
The concept of materiality emerged in early disclosure regulation to communicate disclosure
requirements to companies and to establish a standard against which compliance with disclosure
regulation can be assessed. Materiality supports the premise that investors are entitled to the

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information that is reasonably likely to affect their decision to buy shares in a company, and that
companies are therefore responsible for identifying and disclosing that information. Materiality
establishes a boundary around the information companies are required to disclose and that
which they are not obligated to disclose, so that companies are not overburdened with disclosure
obligations.

2. What concepts underpin investor-focused materiality?

Four concepts underpin early definitions of investor-focused or ‘financial’ materiality:
• Materiality is a function of the report user. Users include ‘prudent’ or ‘informed’ investors.
Information is material if it can influence the judgments investors and other providers of capital
make when deciding to provide financial resources to a company.
• Materiality is not about every investor or any one investor. Investors are not universally the
same. They bring different objectives and levels of expertise. Rather than attempt to accommodate
the information needs of every possible investor, preparers are asked to consider those who have
a baseline level of knowledge and understanding.
• Materiality is contextual. Preparers must consider how investor decisions may be influ-
enced if significant information is absent, inaccurate or otherwise presented in an unfair manner.
In other words, materiality is not strictly about whether a given piece of information is accurate
or not. Rather, it is about the effect of that information, misstatement or error in the context of a
specific company.
• Material information is not always monetary in nature. While it is true that material financial
information is often expressed in monetary terms (i.e., as currency), no definition specifies that
materiality applies only to monetary information. Materiality for investor-focused reporting can
apply to non-monetary metrics as well as qualitative information. All material information relates
to the financial position, financial performance and prospects of a company, but it is not always
expressed in monetary terms.
These fundamental characteristics of materiality have long applied to general purpose finan-
cial reporting and continue to apply today, including in the context of sustainability-related financial
disclosure.

3. As defined by accounting standards, who are primary users and what are primary
users’ objective(s)?
Primary users include existing and potential investors, creditors and lenders. Their objective
is to make informed decisions about providing resources (namely financial capital) to a company.
While users often have a variety of individual characteristics and needs, financial accounting
standards such as the IFRS Accounting Standards identify traits that can be expected of primary
users, and their common information needs, to help guide disclosure decisions.

4. What are the concepts of omissions, misstatements and obscurement?

The combined concept of omissions, misstatements and obscurement maintains that assess-
ing if investors could be influenced by a piece of information is a matter of considering the effect
the information in question could have if it is stated incorrectly, not disclosed or is obscured by
unnecessary, immaterial information.

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Specifically, the concept of misstatements exists to ensure preparers provide accurate infor-
mation. Information can be ‘materially misstated’ if it is incorrect or otherwise inaccurate. The
concept of omissions exists to ensure companies provide all the information that could reasonably
influence investor decisions. Preparers must provide enough information so that the information
they have provided is not misleading because of what has been omitted. The concept of obscure-
ment exists to ensure material information is communicated fairly and effectively. Obscurement
may exist where preparers aggregate information that hides important details or provides an
unnecessary amount of detail to minimize material information.

CHAPTER 4

1. What does the rise of intangible assets mean for corporate disclosure?
The increasing proportion of intangible assets as a percent of total market value highlights
that a very significant amount of information related to companies’ financial position, financial
performance and prospects is not accounted for in traditional financial statements. As a result,
investors do not have access to important information that could reasonably influence investment
decisions. This is evidenced in the fact that intangibles are particularly susceptible to mispricing
by the market. Investors tend to misprice shares of intangibles-intensive companies, either over-
valuing or undervaluing assets to the detriment of investors and companies alike.

2. What factors contribute to increasing investor interest in non-financial information?

In addition to increasing awareness of the ‘intangibles gap,’ the value of non-financial or
‘extra-financial’ disclosure has been endorsed by key organizations in the financial reporting
community, who collectively support the notion that business reporting, both within financial state-
ments and beyond, needs to improve to better serve the users of company reports. As such,
‘non-financial’ information, including sustainability information, has become a common component
of company reports, used to disclose that information which is relevant to evaluating a company’s
financial position, financial performance and prospects but is not reflected in financial statements.
The growth of responsible investment practices also prompted an increased focus among inves-
tors on other sources of information that lend insight into company value, including a rejection of
extreme short-termism and the recognition that long-term value generation falls within fiduciary
duties of care.

CHAPTER 5

1. What role do data providers play in the sustainability information value chain?
Data providers, which are typically for-profit companies, provide products and services such
as aggregated datasets, analytics platforms and company ratings/rankings that allow investors to
research and compare sustainability-related information efficiently across companies, sectors and
markets. Within the sustainability information value chain, they are considered ‘information users.’
They source data from company disclosures and other public resources to create their products
and services, and design those products and services to meet customer needs.

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2. What unique challenges exist related to sustainability data?

Sustainability data is different from information provided in traditional financial statements
in many ways, creating unique challenges. For one, many different audiences are interested in
sustainability information, and companies are often compelled to consider the needs of a wider
range of stakeholders beyond investors when making decisions about what sustainability informa-
tion to provide and prioritize. However, historically sustainability reporting has not been designed
specifically for investors, which has caused investors to lack confidence in companies’ sustainabil-
ity disclosures. Furthermore, sustainability is diverse and multidisciplinary, meaning companies
and investors must work with more diverse datasets. Quantitative sustainability data is often
disclosed using different metrics and units of measure for the same sustainability matters, inhibit-
ing comparability. Similarly, companies often use different methodologies for preparing data, and
often processes for preparing data are not subject to internal controls, limiting the consistency and
reliability of sustainability information in capital markets. Finally, sustainability information tends
to be future-oriented. Like financial information, sustainability data often relies on estimates and
assumptions, which may give the impression that certain data cannot be reliably used.

CHAPTER 6

1. In the sustainability information value chain, what role do standard-setters play?

Standard-setters enable companies to consistently disclose sustainability information, facil-
itating better decision-making and transparency in the global business community. Standards
underpin all information in the sustainability information value chain, providing the critical informa-
tion infrastructure that directly shapes what companies report and how that information is used
downstream. They are typically non-governmental, non-profit organizations that are accountable
to the public, operate with a high degree of transparency and employ processes that balance the
needs of information producers and users.

2. Describe the four distinguishing characteristics of sustainability disclosure guidance.

Prior to the formation of the ISSB, existing guidance for voluntary sustainability disclosure
could (and in many cases still can) be distinguished based on whether or not it is a standard or a
framework, and whether it supports the production of industry-agnostic or industry-specific infor-
mation. Standards constitute a set of specific, replicable and detailed guidance for what topics and
metrics should be disclosed. Frameworks provide a set of concepts and principles for how infor-
mation is structured and prepared, as well as what broad topics are covered. Industry-agnostic or
‘cross-industry’ disclosure guidance provides reporting criteria that can be ubiquitously applied
by any company, regardless of the industry in which it operates. Industry-specific disclosure guid-
ance establishes criteria that are relevant to companies in a specific industry. Prevalent sources
of sustainability disclosure guidance today, such as the IFRS Sustainability Disclosure Standards
and European Sustainability Reporting Standards (ESRS) contain all four characteristics to support
comprehensive disclosure.

3. What two main events contributed to the formation of the ISSB?

First, the CDP (formerly the Carbon Disclosure Project), the Climate Disclosure Standards
Board (CDSB), The Global Reporting Institute (GRI), the International Integrated Reporting Council
(IIRC) and the Sustainability Accounting Standards Board (SASB) published a joint ‘Statement of

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Intent to Work Together Towards Comprehensive Corporate Reporting.’ The statement described
a collective view of how each organization’s standards and/or frameworks align with the others’,
provided a joint vision for the development of a comprehensive corporate reporting system and
stated a commitment to work together to provide joint market guidance.
Second, the IFRS Foundation Trustees released and invited public comment on the
‘Consultation Paper on Sustainability Reporting’ to gather feedback on the need for consistency
in reporting and the potential creation of a new international sustainability standards board under
the governance of the IFRS Foundation. Combined, these two events helped to establish a vision
and gather the necessary public input to determine the needs of the market, which led to the
formation of the International Sustainability Standards Board (ISSB) under the IFRS Foundation.

4. What resources do the IFRS Sustainability Disclosure Standards build from?

The IFRS Sustainability Disclosure Standards are built from the CDSB Framework, Integrated
Reporting Framework, SASB Standards and the TCFD Recommendations to create a common set
of investor-focused sustainability disclosure standards.

CHAPTER 7

1. What is the ISSB’s approach to materiality?

The ISSB adopted the same definition of materiality used by the International Accounting
Standards Board (IASB). In so doing, the ISSB’s approach to materiality follows the long-standing
application of the concept, which was developed for securities law and financial accounting and
is linked to investor decision-making. Sometimes referred to as ‘financial’ materiality, it serves
the same primary users (investors, lenders and creditors that make decisions about whether to
provide resources to a company), focuses on meeting the common information needs of those
users and relies on the concept of omissions, misstatements and obscurement. In this sense, the
criteria used to determine if sustainability information is material is the same as the criteria used
to determine if information in financial statements is material: Is the information reasonably likely
to influence investor decisions?

2. What is the GRI’s approach to materiality?

The GRI’s approach to materiality is impact focused. The GRI Standards prompt companies to
identify and disclose ‘material topics’ and define material topics as ‘topics that represent an orga-
nization’s most significant impacts on the economy, environment, and people, including impacts
on their human rights.’ The GRI approach to materiality goes beyond considering how specific
information would affect the decisions of report users. The GRI Standards state that stakehold-
ers, including but not limited to investors, should be considered and engaged to help companies
identify their material impacts.

3. What is the EFRAG’s approach to materiality?

The EFRAG’s approach to materiality combines investor-focused materiality with impact mate-
riality into what is defined within the ESRS as ‘double materiality.’ This approach to materiality
prompts companies to ‘identify the material impacts, risks, and opportunities to be reported’ to

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develop disclosures that both communicate a company’s impacts and provide decision-useful
information to investors.

CHAPTER 8

1. What does ‘climate first’ disclosure guidance tell us about regulators’ approach to
sustainability disclosure globally?
Regulators and other institutions that provide disclosure requirements often focus on climate
information before focusing on the universe of sustainability matters. Though there has not been a
visible, globally coordinated effort to follow this approach, it can be observed across jurisdictions.
For capital markets, efforts to embrace climate reporting not only represent a shift in what corpo-
rations must disclose—where an additional subset of non-monetary climate information enters the
realm of financial performance evaluation—but also shape how sustainability-related information
is presented and communicated.

2. What are four types of guidance shaping global disclosure rules?

When looking across the sustainability disclosure rules established by regulators, there are
several different types of guidance that dictate what companies disclose and how they disclose it.
First, interpretive guidance establishes how sustainability disclosure applies to existing disclosure
rules. In other words, it requests or mandates sustainability disclosure without issuing a new rule
or policy. Second, principles-based guidance provides a list of tenets that companies use to guide
their reporting process. Third, comply-or-explain-based guidance often applies to new mandatory
disclosure requirements, where companies must comply with reporting guidance or explain why
they have not. Line-item disclosure guidance refers to the disclosure of sustainability information
using specified metrics and methodologies to produce explicit line items.

3. What two considerations must sustainability disclosure rules balance, and how do
disclosure standards help achieve that balance?
Sustainability disclosure rules must balance the tradeoffs between flexible implementation
among preparers and the usability of information for investors in the broader market. Flexible
implementation makes it easier for companies to report information, thus increasing the level of
disclosure, but risks proliferating information that is not comparable or decision-useful. On the
other hand, specific and more stringent requirements support comparability and decision-use-
fulness but risk creating pushback or frustration from the corporate community, especially if the
requirements are overburdensome and not well crafted. Standards can enable comparability with-
out prohibiting companies from making appropriate and useful adjustments or additions.

CHAPTER 9

1. What were the inaugural goals of the ISSB?

The inaugural goals of the ISSB were to develop sustainability disclosure standards that:
• Enable companies to provide comprehensive information. The IFRS Sustainability
Disclosure Standards are designed to support companies in disclosing material information

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on all the sustainability-related risks and opportunities that could reasonably be expected
to affect the company’s cash flows and its access to finance or cost of capital. This
includes, but goes beyond, climate information.
• Are internationally applicable. The IFRS Sustainability Disclosure Standards are designed
to be effective and useful for companies and investors regardless of country of domicile,
location of operations or economic setting.
• Serve as a baseline of disclosure from which jurisdictions can build. The IFRS Sustainability
Disclosure Standards are designed to be compatible with local disclosure rules of major
jurisdictions (such as ESRS) and complementary to multi-stakeholder reporting standards
(such as the GRI Standards).

2. What is the primary objective of the IFRS Sustainability Disclosure Standards?

The objective of the IFRS Sustainability Disclosure Standards is to provide useful information to
investors. Specifically, the IFRS Sustainability Disclosure Standards require companies to disclose
information about its sustainability-related risks and opportunities that are useful to primary users
of general purpose financial reports.

3. What are the qualitative characteristics of useful sustainability-related financial

information?
Two fundamental characteristics and four enhancing characteristics define useful sustainabil-
ity-related financial information. The two fundamental characteristics are: (1) relevance and (2)
faithful representation. The four enhancing characteristics are: (3) comparability, (4) verifiability,
(5) timeliness and (6) understandability.
Sustainability-related financial information is relevant if it can make a difference in the deci-
sions of primary users. Relevant information can be identified by whether it has predictive value or
confirmatory value. To faithfully represent a sustainability-related risk or opportunity, a disclosure
must describe that risk or opportunity in a way that is complete, neutral and accurate.
Comparability allows users to identify similarities and differences in what they are evaluating.
With comparable data, users are able to evaluate a company against its own past performance
and against other companies (particularly those that operate in the same industry or have similar
activities) in order to choose between alternatives. Verifiability gives users confidence that informa-
tion is complete, neutral and accurate. In general, information is verifiable if various independent
observers, including assurers, could reach consensus that a particular piece of information
represents the sustainability-related risk or opportunity it relates to. Sustainability information is
timely if it is made available to users in time to influence their decisions. Sustainability information
is understandable if it is clear and concise.

CHAPTER 10

1. What are the four core content areas of the IFRS Sustainability Disclosure Standards?
What information does each area include?
The four core content areas are derived directly from the TCFD Recommendations. They
include (1) governance, (2) strategy, (3) risk management and (4) metrics and targets.

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Governance content encapsulates the processes, controls and procedures a company uses
to monitor and manage sustainability-related risks and opportunities. This content area provides
users with an understanding of how a company’s board and management are involved in address-
ing sustainability-related risks and opportunities. Strategy content captures the approach a
company takes to manage sustainability-related risks and opportunities. It provides users with
an understanding of the specific sustainability risks and opportunities that are relevant to perfor-
mance and prospects; their anticipated effects on the company’s position, performance, and
cash flows; and how those risks and opportunities have been factored into financial planning. Risk
management refers to the processes used to identify, assess, prioritize and monitor sustainabil-
ity-related risks and opportunities. This content area allows users to assess a company’s overall
risk profile and to understand the processes used to manage those risks. The final core content
area, metrics and targets, are necessary to understand a company’s performance in relation to
sustainability-related risks and opportunities. This may include metrics associated with a specific
risk or opportunity, or it may include progress toward any targets the company has set or is
required to meet by law or regulation.

2. What are the IFRS Sustainability Disclosure Standards sources of guidance?

The sources of guidance designated within IFRS S1 General Requirements for Disclosure
of Sustainability-related Financial Information support preparers in identifying relevant risks and
opportunities and associated material information across the universe of sustainability matters.
Preparers refer to the sources of guidance where other IFRS Sustainability Disclosure Standards,
such as IFRS S2, do not provide more detailed and specific disclosure requirements related to
specific risks and opportunities.
The SASB Standards constitute the only required source of guidance. To comply with the IFRS
Sustainability Disclosure Standards, preparers are required to refer to and consider the applica-
bility of the SASB Standards to (1) identify sustainability-related risks and opportunities and (2)
identify which information associated with a sustainability-related risk or opportunity to disclose.
IFRS S1 identifies optional sources of guidance as well, however not all optional sources of
guidance are suitable (and thus permitted to be used) for both of the two steps defined above.
To identify sustainability-related risks and opportunities, preparers are permitted to refer to
and consider the applicability of the CDSB Framework Application Guidance and the materials of
other investor-focused standard-setters and industry practices.
To identify which information associated with a sustainability-related risk or opportunity
to disclose (i.e., to identify material information), preparers can refer to the CDSB Framework
Application Guidance, the materials of other investor-focused standard-setters and industry prac-
tice, the ESRS and the GRI Standards.

3. What are the components of a SASB Standard?

Each SASB Standard contains an industry description, disclosure topics, metrics and tech-
nical protocols.
Industry descriptions help companies and investors identify applicable SASB Standards by
describing the business models, activities and other common features that characterize participa-
tion in the industry. Disclosure topics describe specific sustainability-related risks or opportunities
associated with the activities of companies within a particular industry. Metrics are designed to,

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either individually or as part of a set, provide useful information on a company’s performance for
a specific disclosure topic. Metrics may be quantitative or qualitative. The SASB Standards also
include activity metrics that capture the scale of specific activities or operations. Finally, technical
protocols provide guidance on definitions, scope, implementation and presentation for the asso-
ciated metric. This detailed guidance sREupports preparers when producing metrics. Technical
protocols are also intended to constitute suitable criteria for third-party assurance, thus ensuring
the verifiability of reported information.

4. What is the Sustainable Industry Classification System (SICS) and how does it differ
from traditional industry classifications?
The SICS is an industry classification system that groups companies within an industry based
on exposure to similar sustainability-related risks and opportunities. Within a SICS industry,
companies tend to have similar business models, face similar growth and innovation opportunities,
operate in the same legal environment, rely on similar resources, produce comparable products
and services, and have comparable impacts on society and the environment. This is different from
traditional industry classification systems, which group companies within an industry based on
financial characteristics such as primary revenue streams.

CHAPTER 11

1. What are the steps of the ISSB standard-setting process?

The ISSB standard-setting process consists of four steps. The first step is research and proj-
ect screening, where technical staff analyze the need for new standards or amendments to existing
standards. If the need for a potential standard-setting project is identified, the ISSB publishes a
document to elicit public input, which is used to determine if the project should move forward. If a
standard-setting project is supported, the second step is to propose a new standard or amend-
ment. Here, the ISSB works to align on the technical details of the proposal then votes to issue an
exposure draft for public consultation. After the public consultation period has closed and feed-
back has been extensively reviewed, the third step is to redeliberate and publish. At this stage,
the Board considers whether the project should be discontinued or re-exposed for additional
feedback, or it identifies changes that should be made to the Standard to prepare it for balloting
and publication. If it passes a final vote, the Standard is published along with an effects analysis
and supporting materials. The fourth step is post-implementation review, where the Board and
technical staff monitor the use and efficacy of the Standard(s) in the market.

2. What three principles are applied to ISSB due process?

The three principles applied to ISSB due process include (1) transparency, (2) full and fair
consultation and (3) accountability.
Transparency is achieved through public meetings and publications. Meetings involving tech-
nical discussions and decisions are open to the public and recorded for anyone to view at a later
date. All associated materials, such as staff papers and decision summaries, are also publicly
available. Full and fair consultation is necessary to gather different perspectives and to ensure the
Standards are effective in the real world. Consultations are carried out in various ways, including
invitations to comment, meetings, roundtables and other consultation events. Lastly, the ISSB
maintains accountability for the effects of proposed Standards and evaluates the benefits and
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costs of implementing new requirements. The public can access this analysis through published
effects analyses and the basis of conclusions documents that accompany each Standard.

3. When developing the SASB Standards, what two types of evidence were assessed to
identify industry-level disclosure topics?
When the SASB Standards were developed by the Sustainability Accounting Standards Board,
the methodology employed to identify industry-level disclosure topics analyzed (1) evidence of
interest and (2) evidence of financial impact.
To surface disclosure topics of interest to investors, the Five Factor Test was applied to a vast
range of source materials. This method evaluated financial impacts and risks; legal, regulatory and
policy drivers; industry norms and competitiveness; stakeholder concerns and social trends; and
opportunities for innovation. To assess evidence of financial impact, each topic surfaced by the
Five Factor Test was additionally vetted for its connection to revenues or costs, assets or liabilities,
and/or cost of capital.

CHAPTER 12

1. What are two reasons why companies disclose investor-focused sustainability

information?
Companies disclose investor-focused sustainability information to meet investors’ information
needs, often alongside the needs of other stakeholders. While investors need to be able to iden-
tify which information could reasonably affect their investment decisions, many companies report
sustainability information intended for other audiences as well. They also do so to communicate
the link between the company’s management of sustainability-related risks and opportunities
and its financial performance. Where companies explain how the management of sustainability
disclosure topics supports financial management and outcomes, companies can create a clear
narrative linking sustainability information to financial performance.

2. Where do companies disclose investor-focused sustainability information?

Companies disclose investor-focused sustainability information in a variety of places, such as
regulatory filings, annual financial reports, sustainability reports, integrated reports, stand-alone
reports and web-based platforms. The IFRS Sustainability Disclosure Standards do not require
disclosures to be filed in a specific location, as general purpose financial reports can be published
in various locations. In a growing number of jurisdictions, public reporting of certain sustainability
information may be compulsory, in which case regulators designate a specific disclosure location.

3. What investor-focused sustainability information are companies disclosing?

When companies disclose investor-focused sustainability information, they must choose which
industries, disclosure topics and metrics provided by standards to use. The IFRS Sustainability
Disclosure Standards and sources of guidance help companies identify applicable industry (or
industries) and select disclosure topics and metrics that are reasonably likely to affect the compa-
ny’s prospects. Preparers have the discretion to determine if certain topics and metrics ought not
be included among their disclosures. Depending on the company’s business model and activities,
these topics may span multiple industries. In addition to quantitative metrics, qualitative information

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and surrounding context can be necessary for investors to fully understand a company’s manage-
ment of specific sustainability-related risks and opportunities.

4. How do companies disclose investor-focused sustainability information?

The ways companies disclose investor-focused sustainability information can vary consid-
erably. When companies gain assurance for their disclosures, it often varies by the type of
assurance received and the level of information assured. Companies may choose to organize
and format data in different ways, provide time-series data that covers more reporting periods,
provide data within downloadable spreadsheets or demonstrate continuous improvement from
period to period. Companies can benefit from considering investor expectations and preferences
for data presentation.

CHAPTER 13

1. What evidence points to increased investor demand for sustainability information?

Investors have increasingly expressed demand for sustainability information through collective
public statements, as well as through direct engagement and requests with investees. In addition,
increased investor demand for sustainability information is evidenced by the number of investors
of all types stating publicly and/or expressing via survey that sustainability information is central
to their work.

2. How has the growth of index funds shaped corporate-investor communication?

Index funds continue to make up a higher proportion of total market share, as asset managers
around the world move their dollars from active investment strategies to index, or ‘passive,’ invest-
ment strategies. When invested in an index, investors do not have the ability to select individual
securities. They are bound to the performance of the index as a whole. As a result, they may be
incentivized to work with companies to meet common performance goals and engage (rather than
divest) to improve performance related to sustainability.

3. What role does sustainability play in investor stewardship?

Stewardship codes generally require institutional investors to be transparent about their invest-
ment process, engage with investee companies, and vote in shareholder meetings. Stewardship
codes naturally promote stronger coordination among investors and investees in addressing
sustainability-related risks and opportunities. In addition to encouraging collaborative engagement
on shared sustainability-related concerns, stewardship codes often encourage better disclosure
with more standardized metrics to make it easier for investors to understand the sustainability-re-
lated risks and opportunities relevant to a company.

CHAPTER 14

1. How does material sustainability information support cross-functional

communication?
Information that is material from an investor-focused perspective can serve as a bridge
between professional roles within companies. The process of disclosing sustainability information

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is also inherently cross-functional, requiring data collection from various business units, inter-
nal audit engagement, legal compliance, management approval, investor relations and other
functions to integrate sustainability information into their workflows. As standards focused on
capturing the effects of sustainability-related risks and opportunities on companies’ financial posi-
tion, performance and prospects, the IFRS Sustainability Disclosure Standards lend themselves
well to bridging the conversation between finance and sustainability-oriented specialists within
companies.

2. Why do companies pursue sustainability disclosure?

Sustainability disclosure is becoming compulsory in a growing number of jurisdictions.
Whether mandatory or voluntary, companies’ approach to disclosure may be motivated by a
wide range of factors. To maximize the benefits of the sustainability disclosure process, compa-
nies can benefit from aligning on the ‘why.’ That ‘why,’ often includes (1) taking ownership of its
sustainability story, (2) peer effects, (3) improving access to capital and (4) improving performance
management.
An increasing number of third parties rate and rank company performance and, as a result,
communicate a company’s sustainability performance on its behalf. Though no company can
completely control the way its data is used downstream, it may be motivated to clearly tell its own
story, and to counterbalance or reinforce the story told by third parties. The disclosure practices of
industry peers and competitors may also motivate companies to pursue sustainability disclosure,
or to disclose certain sustainability-related risks or opportunities, where companies face pressure
to be among the top performers in their industry or where peer reporting behavior generally influ-
ences how and what others choose to disclose. As indicated by growing demand for sustainability
information among public investors, standardized sustainability disclosure can serve as a means
to communicate across markets to attract capital. Finally, the disclosure process itself and the use
of specific disclosure standards and frameworks can help companies generate a more complete
view of the sustainability-related risks and opportunities, illuminating new risks and opportunities
or enhancing insight into those already known and managed.

3. How do sustainability metrics contribute to strategic decision making and corporate

management?
The right metrics can be the difference between effectively managing sustainability perfor-
mance or experiencing performance declines. The material sustainability-related metrics identified
for disclosure can be used to make management decisions and inform strategy. Such metrics can
support companies in aligning sustainability with financial performance, offer a more complete
picture of risk and even contribute to achieving a sustained competitive advantage.

CHAPTER 15

1. How does investor-focused sustainability disclosure help meet the needs of different
types of investors?
Across investment goals, strategies, asset classes and security types, investors use sustain-
ability-related financial information to support investment decisions. Whether an impact investor
tracking certain metrics, a fund manager applying positive or negative ESG screens, an equity
analyst integrating sustainability data into fundamental analysis, a private equity fund engaging
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with companies on sustainability performance goals or a credit analyst bolstering risk analysis,
the use of material sustainability data can enhance pre and post-investment decision making.

2. How is the use of sustainability information in corporate fixed-income different

from the use of sustainability information in public equity? How is this similar to or
different from the use of sustainability information in private equity?
The similarities and differences between the use of sustainability information across public
equity, private equity and fixed income are nuanced and depend on the specific goals and exper-
tise of the investor. However, differences across these asset classes fall at the lines of evaluating
upside potential, downside risk and levels of company engagement. Public equity investors
conduct analyses to price securities and evaluate future returns. As such, their analysis will focus
both on risks and opportunities related to the firm, with the particular goal of evaluating upside
potential. In fixed income, investors are primarily concerned with evaluating a company’s ability
to repay and are concerned with factors that may influence default probability and loss severity.
Here, investors’ primary (though not singular) concern revolves around a company’s ability to
manage sustainability-related risks and protect against downside risk. In private equity, investors
traditionally take on a more involved role—engaging with the company throughout due diligence
and the holding period, and often bringing managerial expertise to support the company. Here,
sustainability is often used to identify metrics and manage performance against those metrics
over time.

3. How do existing data challenges inhibit investors’ ability to use sustainability data?
Investors experience a wide range of challenges related to sustainability data in the current
landscape. For one, there is an abundance of binary, policy-based data and a lack of quantitative
performance data disclosed from companies, meaning investors often have trouble obtaining
information that lends direct insight into company performance related to sustainability matters.
Even where companies do disclose quantitative performance information, it is not always compa-
rable, as companies reporting on the same sustainability-related risk or opportunity often use
different metrics and methodologies. In addition, widely-used third party ratings providers typically
use different scoring methodologies and data inputs, which can skew analysis for those reliant
upon third-party ratings and rankings. Sustainability data is also often limited to that which has
been historically captured or is easiest to capture, which in some cases can make it difficult for
investors to interpret where data captures partial performance or the performance of the whole
entity. Historically, sustainability data has not been subject to internal controls, board oversight,
or assurance processes, limiting its reliability. In addition, a significant amount of sustainability
data disclosed by companies is not material from an investor perspective, making it difficult for
investors to differentiate between information that is or is not reasonably likely to influence invest-
ment decisions. As demand for quality sustainability information increases, investors increasingly
request specific data through a range of channels, inundating companies with different requests
and impairing efficient communication between companies and their investors.

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SAMPLE QUESTIONS

The following sample questions have been developed to mimic the style and rigor of the ques-
tions on the FSA Credential Level I exam. As with the Level I exam, the correct answers are derived
from the information contained in the Level I Study Guide. Explanations for correct and incorrect
answers are provided in the following section.

1. What is the primary challenge that the disclosure of company policies (such as
sustainability 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.

JUMP TO EXPLANATIONS

1: A, 2: D
January 2024

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3. The disclosure of sustainability-related financial information serves 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 performers

4. The table 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:

Incorporate inventory management and procurement processes to supplement

1
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’?

A. A description of the company’s strategy to protect customer data

B. Units produced annually
C. History of product recalls
D. Capital expenditures (CAPEX)

JUMP TO EXPLANATIONS

3: A & C, 4: D, 5: B

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6. 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 business ethics : revenue growth in the context of price-based ratios (e.g. PE
or PEG ratios)

7. For disclosed information to faithfully represent a sustainability-related risk or

opportunity, what three attributes must that information have? (Choose three)

A. It can be used by investors to predict future outcomes, meaning it can be used as an input
to various tools for financial analysis.
B. It includes all the information necessary for users to understand the risk or opportunity
faced by the company.
C. It is not biased, meaning it is not provided in a way that will make it more or less likely that
a user will interpret it favorably or unfavorably.
D. It is clear and concise, meaning it avoids ‘boilerplate’ information that is not specific to the
company.
E. It is free from material error, meaning descriptions are precise and estimates, approxima-
tions and forecasts are identified.

8. On the spectrum of ‘values’ to ‘value’ focused investing, which investment approach

that uses sustainability information is farthest on the ‘value’ end?

A. Impact investing
B. Exclusionary screening
C. ESG integration
D. Positive screening

JUMP TO EXPLANATIONS

6: B, 7: B, C & E, 8: C

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9. What fundamental premise is the concept of ‘materiality’ built from in the context of
corporate disclosure?

A. Investors are entitled to the information that may affect decisions to buy shares in a
company, and companies are responsible for identifying and disclosing that information.
B. Companies are entitled to capital flows from investors, and investors are responsible for
identifying the companies that align closely with their investment hypothesis.
C. Investors are responsible for fully evaluating the risks and opportunities associated with an
investment, and companies are entitled to transparency about those assessments.
D. Companies are responsible for disclosing all material impacts associated with their activi-
ties, and investors are entitled to the social and environmental information related to those
impacts.

10. What is a benefit of disclosure standards that are developed using an industry-
specific approach to standard-setting?

A. They provide companies with more detailed disclosure support, helping to refine internal
processes.
B. They strengthen integrated reporting, helping companies better communicate how they
create value over time.
C. They yield timely, accurate data that supports price discovery and integration by investors.
D. They produce tailored, useful disclosures while achieving the market benefits provided by
standardization.

11. What are two challenges investors face when integrating sustainability disclosures
into financial analysis? (Choose two)

A. Many companies disclose binary sustainability data rather than performance data.
B. Disclosed sustainability information is often not comparable within an industry.
C. There is an overabundance of material sustainability data which decreases investor
confidence.
D. Historically the majority of companies have gained third party assurance.

JUMP TO EXPLANATIONS

9: A, 10: D, 11: A & B

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

12. In the sustainability information value chain, which organizations are involved in the
production of sustainability data, and which organizations are involved in the use of
sustainability data?

A. Frameworks and standards, data providers, and reporting organizations produce informa-
tion. End users and software providers use information.
B. Data providers, standard-setters, and sustainability ratings produce information. Securities
exchanges and report preparers use information.
C. Analytics platforms and data aggregators produce information. Investors, regulators, and
non-government organizations (NGOs) use information.
D. Reporters, disclosure platforms, and auditors produce information. Data providers, analyt-
ics platforms, and regulators use information.

13. An analyst at an investment bank is evaluating a group of telecommunications

companies. The analyst adjusts their original analysis based on each company’s
performance on the same metrics provided in their sustainability-related financial
reports. This event demonstrates that the metrics possess which two characteristics?
(Choose two)

A. Monetary
B. Relevant
C. Holistic
D. Reasonable
E. Representationally faithful

14. An analyst working in a small asset management company has been tasked with
analyzing how sustainability topics affect the risk profile of the firm’s portfolios using
the Sustainable Industry Classification System (SICS). The analyst finds that climate
change poses a risk to several of the industries in which the firm is invested. Which
two of the following options explain why using SICS was likely more helpful than
using a traditional industry classification system? (Choose two)

A. SICS groups industries based on climate sustainability characteristics of sub-industries

in the GICS® system.
B. SICS groups companies within an industry based on sustainability-related risks and
opportunities.
C. SICS yields similar industry sustainability profiles to increase the correlation between
groups of industries.
D. SICS supports decision-usefulness by focusing on industry-specific drivers of financial
performance.

JUMP TO EXPLANATIONS

12: D, 13: B & E, 14: B & D

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15. A reporting company believes that its sustainability performance metrics change
frequently and require extensive contextual information for report users to accurately
interpret. The company wants to disclose sustainability information with robust
contextual information and wants the ability to update the information throughout the
year. Which disclosure location addresses this company’s communication needs?

A. Regulatory filing
B. Annual sustainability report PDF
C. Standalone report
D. Web-based report

16. Which type of investor tends to contribute most to the sustainability-related financial
performance of the firms in which they invest?

A. Fixed-income investors
B. Stock market investors
C. Index investors
D. Private equity investor

17. In its Annual Report, a company in the Containers & Packaging industry uses a clear
narrative and metrics corresponding to specific sustainability-related risks and
opportunities to explain near-term research and development (R&D) expenditures
and long-term market share projections for new products in the context of changing
consumer preferences. What insight does this disclosure style provide to report
users?

A. It describes how well the company is positioned to manage financial opportunities over
time.
B. It explains the link between management of sustainability-related risks and opportunities
and current and future financial performance.
C. It shows how effectively the company uses the IFRS Sustainability Disclosure Standards
alongside additional frameworks.
D. It illustrates the extent to which qualitative information clarifies uncertainties and estimates.

18. What are two ways investors can use investor-focused sustainability disclosure
standards to achieve their goals? (Choose two)

A. To monetize client interest in sustainable investing strategies

B. To assess emerging risks and opportunities over investment time horizons
C. To evaluate how sustainability matters impact risk and return in underwriting decisions
D. To prioritize future generations over current clients when interpreting fiduciary duties of
care
JUMP TO EXPLANATIONS

15: D, 16: D, 17: B, 18: B & C

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

19. What are two characteristics of the current state of sustainability assurance
according to recent research? (Choose two)

A. There is low or no support for assurance providers to learn how to apply existing standards
to the assurance of sustainability disclosures.
B. Most investors believe all information in sustainability reports should be subject to
assurance.
C. Most publicly-listed companies publish sustainability disclosures that include rigorous
third-party assurance.
D. Most external sustainability assurance covers only a selection of reported data.

20. Why do global standard-setters and financial regulators ultimately work together?

A. To provide guidance to national standard setters.

B. To enforce new disclosure standards and monitor compliance.
C. To support stability and transparency in global financial markets.
D. To promote climate disclosure regulation ahead of broader sustainability disclosure
requirements.

21. Which two investment activities are examples of ESG integration? (Choose two)

A. Green bonds
B. Sustainability-related tilts
C. Sustainability information in active private equity
D. Tobacco-free portfolios

22. A third-party assurance provider is performing reasonable assurance services

for a company’s sustainability disclosure, which is prepared in line with the IFRS
Sustainability Disclosure Standards. What should the assurance provider reference to
consistently evaluate the subject matter?

A. The ISSB’s definition of materiality

B. The characteristics of useful sustainability-related financial information
C. Each metric’s technical protocols
D. The principles of ISSB due process

JUMP TO EXPLANATIONS

19: B & D, 20: C, 21: B, C, 22: C

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE
SAMPLE STANDARDS
QUESTIONS

23. An analyst is assessing the default risk of a vegetable producer located in a region
with high baseline water stress. What security type is this analyst most likely
assessing?

A. Public equity
B. Debt
C. Private equity
D. Stocks

24. An investment analyst is assessing the annual emissions of two dairy producers.
Company A discloses its emissions using an in-depth lifecycle analysis (LCA) at the
product level. Company B discloses its emissions using a national facilities-level
greenhouse gas inventory. What challenge does this represent in sustainability
reporting?

A. Sustainability data is reported with high levels of variance

B. Companies use a wide range of subject-matter-specific methodologies
C. Sustainability information relies on estimates and assumptions
D. Companies must cater to the informational needs of different audiences

25. Which three statements accurately describe the various types of regulatory
sustainability disclosure rules? (Choose three)

A. Principles-based guidance allows companies to set sustainability goals against their peers,
increasing comparability but reducing analysis accuracy.
B. Principles-based guidance provides a list of reporting tenets for companies, sometimes
referencing third-party resources to avoid boilerplate disclosures.
C. Interpretive guidance contextualizes sustainability information within existing legal frame-
works, leveraging existing reporting processes.
D. Interpretive guidance requires companies to spend more resources to report sustainability
information, limiting their ability to respond to investor requests.
E. Line-item disclosure guidance makes it easier for users to compare information, enabling
better performance evaluation over time and against peers.
F. Line-item disclosure guidance ensures companies disclose detailed metrics, increasing
the accuracy of data for their unique circumstance.

JUMP TO EXPLANATIONS

23: B, 24: B, 25: B, C & E

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

26. What prevails today as the purpose of financial disclosure?

A. Accuracy of the value of assets upon purchase

B. Decision-usefulness of reported information
C. Management’s view of the entity’s performance
D. Country-specific accounting standards

27. Some of the earliest efforts to promote the disclosure of non-financial information
can be seen in the IFRS Management Commentary and the US SEC’s Management
Discussion & Analysis (MD&A). What two similarities exist between these two
reporting instruments? (Choose two)

A. They specify the use of key performance indicators (KPIs) for sustainability data.
B. They provide context and analysis to interpret a company’s future performance.
C. They are a natural location to disclose material sustainability information.
D. They require a rigorous discussion of a company’s value creation strategy.

28. Which three roles within a corporation typically provide perspective on the financial
materiality of sustainability information, and how sustainability-related risks and
opportunities should be managed? (Choose three)

A. Chief Sustainability Officer

B. Risk Management
C. CEO and CFO
D. Board of Directors
E. Legal Counsel
F. Technology

JUMP TO EXPLANATIONS

26: B, 27: B & C, 28: A, C & D

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

29. What are two components of effective integration of sustainability-related risks and
enterprise risk management (ERM) systems? (Choose two)

A. Risk response systems designed to identify positive impacts on the company.

B. Board oversight of business-unit approaches to risk mitigation.
C. Risk management activities anchored in strategy development and objective-setting.
D. Cross-functional communication to support risk-informed decision making.

30. The table below lists a Disclosure Topic for the same General Issue Category (G.I.C.)
across four different industries. What does this table illustrate about the structure of
the SASB Standards?

Toys &
Meat, Poultry & Processed
Industry Sporting Drug Retailers
Dairy Foods
Goods
General Issue
Product Quality Product Quality Product Quality Product Quality
Category
& Safety & Safety & Safety & Safety
(G.I.C.)
Chemical &
Disclosure Drug Supply
Safety Hazards Food Safety Food Safety
Topic Chain Integrity
of Products

A. General Issue Categories have the same disclosure topics across industries.
B. Disclosure Topics manifest differently across industries based on external impacts.
C. General Issue Categories represent industry-specific sustainability-related risks and
opportunities across sectors.
D. Disclosure Topics represent tailored General Issue Categories that are reasonably likely to
affect the financial performance of companies in a given industry.

31. In the early stages of the sustainability disclosure process, what is one step
preparers can take to better understand their reporting environment?

A. Observe the reporting behavior of industry peers

B. Assemble a disclosure committee for sustainability
C. Engage and monitor non-investor stakeholders
D. Engage with senior leaders to prioritize sustainability

JUMP TO EXPLANATIONS

29: C & D, 30: D, 31: A

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

32. What type of assurance is designed to provide a high level of assurance for
information other than financial statements?

A. Certifications
B. Observation
C. Reviews
D. Examinations

33. What does the history of the formation of accounting standards-setting organizations
leading up to the establishment of the global International Accounting Standards
Board (IASB) and the US Financial Accounting Standards Board (FASB) demonstrate
about the nature of standardized disclosure?

A. There has always been widespread support for standardized accounting practices and
financial disclosure.
B. The accepted purpose and methods of accounting and financial disclosure have evolved
over time.
C. Accounting standards that enable greater flexibility to reporting companies ultimately
benefit investors.
D. Accounting practices must be completely standardized across global jurisdictions to
achieve market efficiency.

34. When the accounting profession redefined the purpose of financial statements in the
1960s, what method came into focus for its decision-usefulness?

A. Discounted future cash flows

B. Historical cost accrual
C. Comparable company analysis
D. Positive screening

35. An analyst is sourcing sustainability data from several companies’ annual reports.
When viewing the reports, they notice that five companies in the same industry have
published sustainability-related financial disclosures using the IFRS Sustainability
Disclosure Standards, and that each of these companies disclosed information using
the same SASB Standard for their industry. Which two of the following attributes can
the analyst expect about this group of five companies? (Choose two)

A. They generate comparable levels of revenue

B. They have similar sustainability ratings
C. They operate in a similar legal environment
D. They face similar growth and innovation opportunities

JUMP TO EXPLANATIONS

32: D, 33: B, 34: A, 35: C & D

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

36. Which two of the following trends are contributing to investors playing a more active
role in corporate governance? (Choose two)

A. The rise of sustainability disclosure

B. The growth of proxy voting
C. The growth of index investing
D. The rise of sustainability in investing

37. Which three of the following components of a company’s external environment are
useful to observe to better understand the sustainability reporting environment when
preparing for disclosure? (Choose three)

A. Executive compensation
B. Regulatory developments
C. Reporting trends among industry peers
D. Proxy voting trends
E. Non-investor stakeholder pressures

38. Which two of the following steps can companies take to both enhance disclosure and
improve understanding of the ways sustainability matters affect business outcomes?
(Choose two)

A. Hire legal experts with expertise in sustainability issues.

B. Collaborate across business functions.
C. Expand existing data management processes to include sustainability information.
D. Create a sustainability department.

39. The fixed income team at an asset management firm is developing a new
sustainability framework to support their pre-investment decision making process.
What will this framework most likely help do?

A. Integrate climate models into discounted cash flow (DCF) analysis.

B. Aggregate narrative data to assess equity value.
C. Support analysis of short-term return potential.
D. Surface ESG issues that affect companies’ ability to repay.

JUMP TO EXPLANATIONS

36: C & D, 37: B, C & E, 38: B & C, 39: D

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

40. A multinational company in the Agricultural Products industry has issued several
bonds backing operations in various regions. Which level of analysis would provide
a fixed-income investor with a useful assessment of how sustainability would affect
investment in the various bonds?

A. At the security level

B. At the market level
C. At the sector level
D. At the industry level

41. A private equity investor is integrating sustainability information into its investment
process with the goal of improving the risk-return profile of their holdings. How will
the investor likely use the IFRS Sustainability Disclosure Standards, including the
SASB Standards, to support this goal?

A. Identify the sustainability-related metrics to use when issuing a new sustainability-linked

bond.
B. Apply a sustainability-focused tilt during portfolio construction favoring low-emitting
companies.
C. Monitor portfolio companies’ adherence to Generally Accepted Accounting Principles
(GAAP).
D. Inform close engagement with portfolio companies concerning material sustainability
information.

42. Related to materiality, the concept of ‘misstatements’

A. ensures prepares provide accurate information.

B. ensures information is communicated fairly and effectively.
C. ensures information faithfully represents the matter it purports to represent.
D. ensures preparers provide all information that could reasonably influence investor
decisions.

43. What are the core content areas of the IFRS Sustainability Disclosure Standards?

A. Governance ; Climate ; KPIs ; Connected information

B. Metrics and targets ; Environmental impacts ; Strategy ; Governance
C. Governance ; Strategy ; Risk management ; Metrics and targets
D. Metrics and targets ; Carbon ; Risk management ; Governance

JUMP TO EXPLANATIONS

40: A, 41: D, 42: A, 43: C

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

44. During which two stages of the ISSB standard-setting process are documents such
as a research paper, request for information or exposure draft typically published to
solicit public comments?

A. During research and project screening, and when proposing a new standard or standard
update.
B. During redeliberation and publication, and during post-implementation review.
C. During effects analysis, and when proposing a new standard-setting project be added to
the agenda.
D. During technical readiness assessment, and during research and project screening.

45. Which of the following statements accurately explain why various sustainability
disclosure standards and frameworks merged to form the ISSB?

A. It was a decision imposed by the International Organization of Securities Commissions to

simplify the disclosure landscape.
B. It was a response to widespread confusion and the market threats posed by increasing
global fragmentation.
C. It was a decision made by the leaders of the IFRS Foundation and the Value Reporting
Foundation to increase profitability.
D. It was a response to market demand for a common source of guidance for disclosing
sustainability-related impacts.

JUMP TO EXPLANATIONS

44: A, 45: B

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

EXPLANATIONS
Below are explanations for the sample questions provided above.

1. This question evaluates Learning Objective 20.

A. This is CORRECT. Many companies report sustainability information in the form of customer
policies. While company policies provide useful information, to investors the presence of
a policy is often represented through a ‘yes-no’ or ‘0-1’ binary. Either the company has the
policy, or they do not. Performance data is typically more useful for investor analysis. See
Section 15.9.1.1.
B. This is incorrect. It may be true that company policies increase the amount of work
analysts do to extract useful information from policy documents, however manual company
policy analysis (or the analysis of unstructured data) is not a universal practice and is not
always true. See Section 5.2.1. and 15.9.1.1.
C. This is incorrect. While preliminary research suggests that in some cases company’s
sustainability policies are established in reaction to poor performance, it is not true that
company policies often provide fraudulent data. See Section 14.5.2. and 15.9.1.1.
D. This is incorrect. Though not universally true, company policies related to sustainability
may identify the roles and departments directly responsible for overseeing the policy. This
is unrelated to the level of company-investor engagement on sustainability matters. See
Section 15.9.1.1.
2. This question evaluates Learning Objective 12.

A. This is incorrect because index investing is not declining, it is increasing. Index funds
continue to make up a higher proportion of total market share. See Section 13.2.1.
B. This is incorrect. When invested in an index, the option to ‘cherry-pick’ or sell individual
shares as a reaction to lower confidence in company management no longer exists. As
index investing grows, the ability to exercise the ‘Wall Street rule’ goes down. See Section
13.2.1.1.
C. This is incorrect because index investing is not declining, it is increasing. Index funds
continue to make up a higher proportion of total market share. Increased withdrawal
rates do indicate that companies and their investors are more willing to work together to
find solutions on sustainability-related governance matters, however this is not linked to a
decline in index investing. See Section 13.2.2.1. and 13.2.1.
D. This is CORRECT. Index fund owners cannot be as responsive to signals from specific
firms as their active fund counterparts, who can sell individual company shares. As index
funds continue to make up a larger proportion of total market share, more index fund inves-
tors are incentivized to work with the companies in which they are invested, encouraging
stewardship with a focus on longer-term investment horizons. See Section 13.2.1.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

3. This question evaluates Learning Objective 2.

A. This is CORRECT. Informed decision-making is one of the seminal values of corporate

disclosure recognized by global disclosure requirements. For investors to make informed
decisions, they must be able to reliably integrate sustainability information into their deci-
sion-making processes, including various forms of analysis. Sustainability information can
be a vital component of informed valuation. See Section 1.2. and 2.3.2.
B. This is incorrect. Historically, regulation mandating corporate disclosure was issued in
response to significant market failures. Corporate disclosure today does not serve as
a channel for companies to communicate to regulatory bodies, and does not demand
additional regulation. See Section 2.2.
C. This is CORRECT. Informed decision-making is one of the seminal values of corporate
disclosure recognized by global disclosure requirements. For investors to make informed
decisions, they must be able to use the information disclosed by companies to assess the
risks and opportunities related to their investments. Sustainability information is often a vital
component of informed investment analysis. See Section 1.1. and 2.2.
D. This is incorrect. In the sustainability information value chain, non-government organiza-
tions (NGOs) publish independent research and engage with investors, regulators and
companies alike to call attention to pressing environmental and social problems and
mobilize action in response to those problems. They rely on transparent corporate disclo-
sure and may embrace a ‘name and shame’ approach to shine a light on poor corporate
management of sustainability matters. They can add an accountability mechanism to the
market, but do not ultimately shape the role disclosure plays in capital markets as a whole.
See Section 5.2.4.2.
4. This question evaluated Learning Objective 16.

A. This is incorrect because #1, ‘incorporate inventory management and procurement

processes to supplement product delivery service,’ is not the earliest stage in value
creation. It represents the third of four stages of value creation: new products and/or
technologies. See Section 14.5.4.1.
B. This is incorrect. Though the sequence starts correctly with #3 as the earliest stage of
value creation, the second number in the sequence, #1, represents the third of four stages
of value creation and is therefore incorrect. See Section 14.5.4.1.
C. This is incorrect because #2, ‘adapting product delivery service to enhance delivery
options’ is not representative of the earliest stage in value creation. Rather, it represents
the second of four stages in value creation: optimizing efficiencies. See Section 14.5.4.1.
D. This is CORRECT. #3, ‘upgrading product ordering processes to reduce costs, time, and/
or errors’ represents the first stage of value creation: minimizing costs. #2, ‘adapting
product delivery service to enhance delivery options’ represents the second stage of value
creation: optimizing efficiencies. #1, ‘incorporate inventory management and procurement
processes to supplement product delivery service,’ represents the third stage of value
creation: new products and/or technologies. #4, ‘refining new and old business lines to
establish brand leadership’ represents the fourth stage of value creation: new business
models and differentiated value proposition. See Section 14.5.4.1.
5. This question evaluates Learning Objective 9.

A. This is incorrect. A description of company strategy represents qualitative data. Activity

metrics are always quantitative. See ‘3. Metrics’ in Section 10.3.1.1.2.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

B. This is CORRECT. Activity metrics are metrics that capture the scale of a company’s
activities or operations. These may include operational data, such the total number
of employees, or other numerical data such as the total annual quantity of products
produced. See ‘3. Metrics’ in Section 10.3.1.1.2.
C. This is incorrect. While historical quantitative data on recall rates may be helpful to
someone analyzing a company’s past performance, this option could not be used to
capture the scale of a company’s activities or operations. See ‘3. Metrics’ in Section
10.3.1.1.2.
D. This is incorrect. The IFRS Sustainability Disclosure Standards, including sources of guid-
ance, do not include metrics for information that is already disclosed in traditional financial
statements. Capital expenditures, a monetary metric, are typically recorded on the balance
sheet. See ‘3. Metrics’ in Section 10.3.1.1.2.
6. This question evaluates Learning Objective 17.

A. This is incorrect. Data about factors that drive brand value are used in DCF analysis to
analyze intangible assets and long-term growth. See Section 15.4.3.2.
B. This is CORRECT. Quantitative data about regulatory compliance can be used in DCF anal-
ysis to assess operational performance and cost structure. A company’s ability to comply
with existing regulation and manage compliance costs can inform important assumptions
used to project a company’s future earnings. See Section 15.4.3.2.
C. This is incorrect. Data about product features required by law are directly related to levels
of product demand, which can be used to evaluate expected product revenue. See
Section 15.4.3.2.
D. This is incorrect. Data about business ethics, such as ethics incident numbers or qualita-
tive measures of risk management, can be used to evaluate operational risks and cost of
capital. Revenue growth in the context of PE or PEG ratios is more closely associated with
product demand. See Section 15.4.3.2
7. This question evaluates Learning Objective 7.

A. This is incorrect. This option describes ‘predictive value’. Predictive value is an element
of ‘relevance’, which is one of two fundamental characteristics that define useful sustain-
ability-related financial information, the other being ‘faithful representation’. ‘Relevant’
information can be identified by whether or not it has predictive value or confirmatory
value. See Section 9.5.1.1.
B. This is CORRECT. To faithfully represent a sustainability-related risk or opportunity, a disclo-
sure must describe that risk or opportunity in a way that is complete, neutral and accurate.
This option describes ‘completeness’. See Section 9.5.1.1.
C. This is CORRECT. To faithfully represent a sustainability-related risk or opportunity, a disclo-
sure must describe that risk or opportunity in a way that is complete, neutral and accurate.
This option describes ‘neutrality’. See Section 9.5.1.1.
D. This is incorrect. This option describes ‘understandability,’ one of four enhancing char-
acteristics of useful sustainability-related financial information. See Section 9.5.1.1. and
9.5.1.2.
E. This is CORRECT. To faithfully represent a sustainability-related risk or opportunity, a disclo-
sure must describe that risk or opportunity in a way that is complete, neutral and accurate.
This option describes ‘accuracy’. See Section 9.5.1.1.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

8. This question evaluates Learning Objective 17.

A. This is incorrect. Impact investing is values-focused. Impact investors consider sustain-

ability information in investment products and strategies with the goal of creating positive
impacts alongside financial returns. The intent is to generate positive social or environmen-
tal returns. See Section 15.2.2.2., Figure 24.
B. This is incorrect. Negative screens or ‘exclusionary’ screens refer to an investment
approach used to avoid specific investments. They can be either values-based or norms-
based. For example, tobacco-free portfolios exclude companies in the tobacco industry
based on values surrounding health and substance use more than the goal of financial
gain. See Section 15.2.2.1., Figure 24.
C. This is CORRECT. ESG integration incorporates sustainability information into traditional
security selection processes to determine whether sustainability matters contribute to
or detract from the financial prospects of a given investment opportunity. See Section
15.2.2.2., Figure 24.
D. This is incorrect. Opposite negative screens, positive screens are used to prioritize and/
or actively choose firms to invest in based on certain criteria. These criteria can be more
values-focused, such as companies associated with certain positive sustainability impacts,
or value-focused, where a fund includes companies with higher return prospects as a
result of their management of specific sustainability-related opportunities. See Section
15.2.2.2., Figure 24.
9. This question evaluates Learning Objective 4.

A. This is CORRECT. As discussed in Chapter 3, financial regulators first defined ‘materiality’

to communicate companies’ disclosure requirements and to assess compliance with those
disclosure requirements. These definitions were based on, and continue to be based on,
the fundamental premise that investors are entitled to the information that may affect their
decision to buy shares in a company (i.e., decision to invest), and that companies are
therefore responsible for identifying and disclosing that information. See Section 3.1.
B. This is incorrect. While most companies certainly seek capital from investors, they are not
entitled to it.
C. This is incorrect. While many investors do thoroughly evaluate the range of risks and
opportunities associated with an investment, they are free to perform any level of analysis
and, indeed, are free to make poor investment decisions. See Section 2.1.
D. This is incorrect. In the historical context of corporate disclosure and capital markets,
companies are not obligated to disclose their impacts on the environment and society.
Rather, they are obligated to disclose information that is reasonably likely to influence the
decisions of investors. Today, many investors and regulators recognize that sustainabili-
ty-related financial information falls within that premise when that information is reasonably
likely to influence the decisions of investors. In some cases, this may include information
related to a company’s social and environmental impacts. See Sections 3.1., 7.1., 7.2. and
7.3.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

10. This question evaluates Learning Objective 7.

A. This is incorrect. Though this type of guidance is tailored to unique industries, it is not
necessarily more detailed than industry-agnostic disclosure guidance. For example, guid-
ance regarding the disclosure of shareholder rights is not necessarily less detailed than
guidance regarding the disclosure of Materials Sourcing Efficiency in the Solar Technology
industry. See Section 9.4.1.
B. This is incorrect. Strengthened integrated reporting is not necessarily a product of indus-
try-specific disclosure.
C. This is incorrect. While industry-specific disclosures may very well be timely and accurate,
the industry-specific nature of disclosure standards is not what determines whether timeli-
ness and accuracy is achieved for reported information. See Sections 9.4.1. and 9.5.1.1.,
D. This is CORRECT. Industry-specific disclosure standards enable companies and investors
to focus on the sustainability-related risks and opportunities (and the information related
to those risks and opportunities) most closely associated with particular business models,
activities, and other common features that characterize participation in an industry. Along
with industry-agnostic or ‘cross-industry’ information, such standards enable the produc-
tion of more useful, tailored information while achieving the market benefits provided by
standardization. See Section 9.4.1.
11. This question evaluates Learning Objective 20.

A. This is CORRECT. While there is an accelerating trend of increased sustainability disclo-

sure, many companies report sustainability information in the form of company policies.
To analysts and investors, the presence of a policy represents binary data. Such policies
provide important information, however when integrating sustainability data into existing
analyses, performance data is more useful. See Section 15.9.1.1.
B. This is CORRECT. Even where material data is disclosed for the same sustainability-re-
lated risks and opportunities, it is often not comparable. Different companies often report
sustainability data on the same topic in different ways. This high level of metric-level
variability reduces comparability and usefulness to investors. See Section 15.9.1.2.
C. This is incorrect. There is an abundance of immaterial sustainability information in the
market, largely owing to the reality that sustainability disclosures have historically been
prepared for non-investor audiences. See Section 5.3.1.
D. This is incorrect. While the assurance of sustainability information is growing, historically
a minority of sustainability disclosures have been assured. See Section 14.4.5.
12. This question evaluates Learning Objective 6.

A. This is incorrect. In the sustainability information value chain, frameworks and standards
underpin all information – supporting both information producers and information users.
Data providers are involved in the use of sustainability information by aggregating quanti-
tative and qualitative data and making it available to customers through technology tools.
Software providers enable information production. They help preparers collect and report
sustainability information and help standard-setters build disclosure taxonomies and
information validations pathways. See Section 5.1., Figure 5.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

B. This is incorrect. As mentioned above, data providers are involved in the use of sustainabil-
ity information. Standard-setters produce disclosure requirements in the form of standards
and underpin both information producers and users. Sustainability/ESG ratings provide
analytics services, which render sustainability information to make it more comparable and
to aid further analysis, thus making it more useful to end-users. Reporting organizations
are considered information producers. See Section 5.1., Figure 5.
C. This is incorrect. Analytics platforms are involved in the use of sustainability information.
Data aggregators are considered data providers, which also facilitate the use of sustain-
ability information (see above explanations). See Section 5.1., Figure 5.
D. This is CORRECT. Reporters prepare and publish the information that is used by down-
stream organizations in the value chain. Disclosure platforms support the production of
sustainability information by enabling reporters, also called preparers, to collect and
disclose information in line with specific standards. Auditors also support the production
of information, as they ensure the reliability of disclosed information through external
assurance and other services. End users such as investors, civil society, and other stake-
holders use/consume sustainability information for their own analysis and decision-making.
Regulators use sustainability information for regulatory purposes, such as setting sustain-
ability-related mandates for public companies. See Section 5.1., Figure 5.
13. This question evaluates Learning Objective 7.

A. This is incorrect. Metrics provided within general purpose financial reports, including
sustainability-related financial disclosures prepared using the IFRS Sustainability
Disclosure Standards are often not monetary in nature. See Section 3.1. and 4.2.
B. This is CORRECT. Relevance is one of the two fundamental characteristics of useful
sustainability-related financial information, used to determine which information can be
used in investment processes. For information to be relevant, it must make a difference in
the decisions of primary users. Relevance can be assessed based on whether the infor-
mation has predictive and/or confirmatory value. See Section 9.5.1., particularly Section
9.5.1.1.
C. This is incorrect. While sustainability-related financial disclosures are indeed used to gain
a more ‘holistic’ view of companies’ performance and prospects (see Sections 8.2. and
10.2.4.), metrics themselves are typically not classified as ‘holistic’.
D. This is incorrect. The term ‘reasonable’ is important to understand the concept of
materiality. Recall that ‘…information is material if omitting, misstating or obscuring that
information could reasonably be expected to influence decisions that primary users of
general purpose financial reports make on the basis of those reports’ [emphasis added].
See Section 7.2. However, the ‘reasonableness’ of a metric does not constitute criteria
against which the usefulness of a metric is determined. See Section 9.5.1.
E. This is CORRECT. Faithful representation is one of the two fundamental characteristics
of useful sustainability-related financial information, used to determine which information
can be used in investment processes. To faithfully represent a sustainability-related risk or
opportunity, a disclosure must describe that risk or opportunity in a way that is complete,
neutral and accurate. See Section 9.5.1., particularly Section 9.5.1.1.

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14. This question evaluates Learning Objective 8.

A. This is incorrect. SICS groups companies into industries based on their value creation
model, their resource intensity and sustainability impacts, and their sustainability innovation
potential. This approach builds on and compliments traditional industry classifications such
as GICS, but does not categorize companies into industries based on any aspect of GICS
directly. See Section 10.3.1.1.3.
B. This is CORRECT. Traditional classification systems typically take either a supply-side,
production-oriented approach or a demand-side, market-oriented approach to classifying
companies. SICS uses a methodology focused on sustainability-related risks and oppor-
tunities, which can have implications for either side. See Section 10.3.1.1.3.
C. This is incorrect. Companies in the same industry tend to have similar business models,
face similar growth and innovation opportunities, operate in the same legal environment,
rely on similar resources, produce comparable products and services and have compa-
rable impacts on society and the environment. Industries are therefore distinguishable
based on the same characteristics. These distinct industry sustainability profiles can help
investors diversify based on sustainability characteristics. See Section 10.3.1.1.3. and
15.5.1.1.
D. This is CORRECT. SICS groups sustainability-related risks and opportunities (referred to
as ‘topics’ under the SASB Standards) and corresponding metrics by industry. As learned
in section 10.3.1.1.2., topics are included in the Standards only if there is strong evidence
of financial impact. This supports decision-usefulness by structuring disclosure into the
information most relevant to financial analysis and focusing on industry-specific drivers of
financial performance (See Section 10.3.1.1.3.).
15. This question evaluates Learning Objective 11.

A. This is incorrect. Regulatory filings are bound by strict disclosure requirements for timing,
completeness and accuracy. See Section 12.3.
B. Annual reports published as a singular PDF are similarly held to annual publishing expec-
tations and may not represent the best format for ongoing updates and timely information.
See Section 12.3.
C. This is incorrect. Companies sometimes disclose sustainability information in a separate
document, in which the only information included is investor-focused sustainability-related
information. This type of disclosure is unrelated to timeliness of reported data. See Section
12.3.
D. This is CORRECT. Web-based reports for sustainability disclosure can allow companies to
report information that is more timely, direct, extensive and navigable. See Section 12.3.
16. This question evaluates Learning Objective 19.

A. This is incorrect. Traditionally, engagement around fixed-income debt instruments has

been low. Fixed income comes with the clear expectation that companies meet repayment
obligations. Sustainability matters can affect borrower’s ability to meet payment obligations,
and lenders can request sustainability disclosure. However, if the payment obligation is
met, investors typically do not have the leverage to request additional performance goals
related to sustainability or otherwise. See Section 15.6.2.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

B. This is incorrect. Stock market investors can inhabit a wide range of roles, from institutional
investors, retail investors and others. Active investors in public equity (stocks) typically
partake in a cycle of monitoring and reporting that can include sustainability-related finan-
cial information. They monitor holdings for adherence to best practices and performance
on certain metrics. They may also engage with companies to influence company-level
decision-making. However, not all investors in the stock market are active investors and
the level of engagement related to sustainability in private equity is more limited than that
in private equity. See Section 15.6.2.
C. This is incorrect. Though index investors will also partake in a cycle of monitoring and
reporting related to sustainability, the nature of index investing (where investors often hold
hundreds or thousands of diversified companies across sectors and regions), inhibits
the level of engagement they can have with specific holdings, thus limiting their level of
influence on matters related to sustainability. See Section 13.2.1. and 15.6.2.
D. This is CORRECT. Private equity investors (or private equity funds) tend to have more
concentrated holdings, have a longer investment horizon and often bring a specific area
of expertise to the management of a company (among other characteristics). Because
of these characteristics, private equity investors tend to engage on a more robust and
frequent basis, where they are closely involved in performance target-setting and engage
in informed dialogues. See Section 15.6.2.
17. This question evaluates Learning Objective 11.

A. This is incorrect because it relates only to financial opportunities.

B. This is CORRECT. Where a report explains how the management of sustainability-related
risks and opportunities supports financial outcomes, users can gain insight into a compa-
ny’s position and prospects based on its management of sustainability-related risks and
opportunities. See Section 12.2.
C. This is incorrect. While it could be reasonable to assume that the information reported
in this scenario was prepared using additional standards or frameworks such as the
Integrated Reporting Framework, there is neither evidence to suggest the use of any
specific standards and frameworks, nor is there any criteria to suggest that ‘effectiveness’
can be assessed.
D. This is incorrect. Qualitative information can be very helpful in clarifying uncertainties and
estimates where companies are not able to provide the most accurate measures. However,
the question does not pertain to uncertainties or estimates within reported metrics. See
Section 12.4.
18. This question evaluates Learning Objective 17.

A. This is incorrect. While investor-focused sustainability disclosure standards such as the

IFRS Sustainability Disclosure Standards and associated resources are used to enhance
a range of sustainable investing strategies, the ability to earn revenue from client-specific
demands is not necessarily a direct benefit of using such standards.
B. This is CORRECT. Investors can use standards such as the IFRS Sustainability Disclosure
Standards, including the SASB Standards and other sources of guidance, to identify and
assess emerging sustainability-related risks and opportunities over time. This is just one
investment activity of many that high quality disclosure standards, and the data they yield,
can support. See Section 15.1.1.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

C. This is CORRECT. The IFRS Sustainability Disclosure Standards, including the SASB
Standards and other sources of guidance, can be used to evaluate how certain sustain-
ability matters (also referred to as sustainability-related risks or opportunities) affect risk
and return in investment decision-making processes across debt and equity. See Section
15.1.
D. This is incorrect. The fiduciary’s duty of loyalty calls for impartial treatment of different
types of beneficiaries, including different generations. Standards such as the IFRS
Sustainability Disclosure Standards, including the SASB Standards and other sources
of guidance, can help fiduciaries take ESG considerations into account where they are
relevant to meet obligations to act in the best interest of their clients or beneficiaries. See
Sections 4.4.3. and 15.1.
19. This question evaluates Learning Objective 15.

A. This is incorrect. There is a growing body of guidance, often published by national or

jurisdiction-level institutions such as the American Institute of Certified Public Accountants
(AICPA) and the Institute of Chartered Accountants in England and Wales (ICAEW), that
exists to support assurance providers. Such guidance assists assurance professional in
interpreting and applying existing assurance standards and procedures to sustainability
disclosure, among other information. See Section 14.4.5.
B. This is CORRECT. According to the 2019 McKinsey report More Than Values: The
Value-Based Sustainability Reporting That Investors Want, 67% of investors believe that
sustainability reports should ‘undergo full audits, similar to financial audit.’ See Section
14.4.5.
C. This is incorrect. While recent data indicates that the number of listed companies that
gain external assurance for sustainability disclosures is increasing, those that do gain
assurance often pursue the more limited option—a review—which typically encompasses
only one data point or a handful of data points rather than all the data presented in the
report. See Section 14.4.5.
D. This is CORRECT. The scope of assurance for sustainability information varies consid-
erably. While the level of sustainability assurance is growing globally, most sustainability
disclosures that include an assurance statement cover only a portion of the reported data.
Assurance is often limited to those measures that have historically been subject to higher
levels of internal control, such as greenhouse gas emissions. See Section 14.4.5.
20. This question evaluates Learning Objective 5.

A. This is incorrect. National standard-setters often look to global standard-setters such as the
IASB and ISSB as a reference point, choosing to completely or partially adopt international
standards to facilitate cross-border communication and investment while, at the same time,
considering local economic, legal and cultural factors that shape the information needs of
its jurisdiction. However, the purpose of providing guidance to national standard-setters
is not a primary reason why global standard-setters and regulators will work together. See
Section 8.1.
B. This is incorrect. Regulators are responsible for enforcing standards and monitoring
compliance. While standard-setters may work with regulators to interpret compliance and
support proper implementation, standard-setters are not involved in standards enforce-
ment. See Section 8.1.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

C. This is CORRECT. Standard-setters and regulators are independent entities. However,

they may work together for several reasons, all of which ultimately support stability and
transparency in global financial markets. See Section 8.1.
D. This is incorrect. There has not been a visible, globally coordinated effort among financial
regulators to institute sustainability reporting requirements and guidance for the express
purpose of prioritizing climate disclosure, however it has been observed that jurisdictions
have independently prioritized disclosure related to climate change. Furthermore, stan-
dard-setters and regulators do not work together to promote a climate-specific agenda.
Rather, they respond to the needs of the market and work together in specific ways to
support stability and transparency in global financial markets. See Section 8.1. and 8.3.
21. This question evaluates Learning Objective 17.

A. This is incorrect. Green bonds and thematic bonds are typically examples of instruments
used in impact investing and/or thematic screens, which involves the use of sustainabil-
ity information in the investment process but, by definition, is not ‘ESG integration.’ See
Section 15.2.2.2.
B. This is CORRECT. Index tilts using sustainability information are an example of ESG inte-
gration. When a tilt is applied to index construction, assets are weighted according to
sustainability performance characteristics, either ‘away’ from undesired characteristics,
such as high carbon emissions, or ‘toward’ desirable characteristics. In indices, the weight
of each company is adjusted based on sustainability information. For example, S&P offers
an ESG Index family that values stocks using ESG scores and corporate sustainability
assessments (among other information), allowing investors to integrate sustainability
matters into core investments without straying too far from the overall profile of S&P broad
market indices. See Section 15.2.2.2.
C. This is CORRECT. ESG integration occurs in active private equity at every stage of the
investment process, from pre-investment due diligence to monitoring and engagement.
See Section 15.2.2.2., 15.5.1. and 15.6.2.
D. This is incorrect. Tobacco-free portfolios are an example of negative or exclusionary
screening, where sustainability information can be used to avoid specific investments.
See Section 15.2.2.2.
22. This question evaluates Learning Objective 8.

A. This is incorrect. As discussed in Chapters 3 and 7, the IASB and ISSB definition of
materiality, which is investor-focused, forms the basis of all disclosure decisions and is
supported by the guidance provided in the Standards. The concept of ‘materiality’ is used
to decide what information to disclose to ensure companies provide information that is
reasonably likely to influence investor decisions. Assurance services are performed primar-
ily to verify the reliability of information within disclosures. The definition of ‘materiality’ does
not directly support data assurance. See Section 14.3.2.3.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

B. This is incorrect. The IFRS Sustainability Disclosure Standards, specifically IFRS S1,
define the qualitative characteristics of useful sustainability-related financial information
to support the standard-setting process, though they are also useful to preparers and
users. Notably, ‘verifiability’ is among these characteristics. The usefulness of sustain-
ability-related financial information is enhanced when it is verifiable, meaning various
independent observers, including assurers, could reach consensus that a particular piece
of information represents the sustainability-related risk or opportunity it relates to. However,
the qualitative characteristics of useful sustainability-related financial information do not
constitute criteria assurers would use when providing assurance services. See Sections
9.5.1. and 14.3.2.3.
C. This is CORRECT. The metrics and underlying technical protocols are designed to serve
as suitable criteria for third- party assurance engagements. For each metric within the
Standards, an accompanying technical protocol provides guidance on definitions, scope,
implementation and presentation that can be applied by both report preparers and
assurance providers. For assurance providers, the protocols help to consistently evaluate
disclosed information. See Sections 10.3.1.1.1. and 14.3.2.3.
D. This is incorrect. The principles that define ISSB due process include transparency, full
and fair consultation and accountability. They are applied by the ISSB to standard-setting
activities. They do not constitute criteria assurers would use when providing assurance
services. See Section 11.2.2.1.
23. This question evaluates Learning Objective 18.

A. This is incorrect. Public securities such as stocks focus on both risk evaluation and oppor-
tunity evaluation, or evaluating upside investment potential. Because public equities do
not rely on repayment at fixed intervals, default risk is not as significant of a concern as it
is for investing in debt/fixed income. See Section 15.4.2.1.
B. This is CORRECT. Debt securities such as credit lines and bonds focus almost exclusively
on evaluating and pricing risk. Sustainability information supports risk analysis. In this
question’s scenario, water-related sustainability information can be used to evaluate
default risk related to the producer’s management of critical inputs and long-term ability
to operate. See Section 15.4.2.1.
C. This is incorrect. Private equity (PE) investors, or stock owners, aim to assess both risk and
upside investment potential. PE investors do not employ fixed-income debt instruments.
Therefore, analysis will not focus on default risk to the same extent as fixed income inves-
tors. See Section 15.4.2.1.
D. This is incorrect. Stocks are an equity instrument. See explanations for A and C
24. This question evaluates Learning Objective 20.

A. This is incorrect. While it is true that high levels of variance between disclosed data for the
same or similar sustainability topics impedes the comparability of information, the question
does not provide any detail regarding the metrics yielded by each company. It is therefore
impossible to determine how much data-level variation occurs between Company A and
Company B.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

B. This is CORRECT. The wide range of subject-matter-specific methodologies employed by

reporting organizations often requires investors to interpret highly diverse sets of data.
Where financial accounting relies on the expertise of professionals within a singular,
long-established discipline, sustainability information relies on the expertise of profession-
als across different facets of environmental science, human resources, finance, executive
functions and many other areas. See Section 5.3.2.2.
C. This is incorrect. While it is true that sustainability information relies on estimates and
assumptions, such practices can be compared to financial statements where the use of
estimates and assumptions does not undermine data quality. See Section 5.3.2.3.
D. This is incorrect. The question specifically identifies an investment analyst as the primary
audience. While it is true that the need to cater sustainability disclosures to different audi-
ences can create challenges for companies, the question does not provide any information
indicating the use of emissions data among more than one audience type.
25. This question evaluates Learning Objective 1.

A. This is incorrect because principles-based disclosure guidance is not associated with

companies’ decision to set performance goals. See Section 8.4.2.
B. This is CORRECT. Principles-based rules provide a list of tenets, such as ‘complete,’
‘concise,’ ‘unbiased,’ or others that companies use to guide their reporting process. They
aim to yield qualitative and/or quantitative information while allowing companies the flex-
ibility to make decisions around what information to report and how to report it. To avoid
generic or boilerplate disclosure, principles-based guidance may reference third-party
standards or frameworks to support implementation with more specific guidance. See
Section 8.4.2.
C. This is CORRECT. Interpretive disclosure rules—or the interpretation of existing rules—clar-
ifies and elaborates on the application of existing regulatory requirements to sustainability
information. Rather than creating new requirements, it relies on existing reporting rules
and procedures. This approach allows regulators, reporting companies and report users
to contextualize sustainability information within established legal frameworks and widely
understood objectives. See Section 8.4.1.
D. This is incorrect. While some reporting entities may choose to expand or grow their
disclosure operations around sustainability, interpretive rules do not require increased
spending to comply with requirements. Reporting costs depend on the company’s specific
circumstances and existing procedures. See Section 8.4.1.
E. This is CORRECT. Rules that mandate the disclosure of specific line items generally make
it easier to compare reported information. Where companies disclose the same metrics
produced using the same methods, investors can better evaluate performance on that
metric over time, relative to industry peers, and even against national and international
sustainability goals. See Section 8.4.4.
F. This is incorrect. While line-item disclosure rules do indeed provide a high level of detail,
where companies are required to report specific metrics they may forego the option to
disclose data that more accurately reflects their unique business and circumstances. See
Section 8.4.4.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

26. This question evaluates Learning Objective 2.

A. This is incorrect. Historical asset valuation, or historical cost accounting, constituted best
practice for preparing financial statements in the 1930s. The emphasis later shifted to
decision-usefulness in the 1960s. See Section 2.3.1.
B. This is CORRECT. In the 1960s, the accounting profession re-envisioned the purpose
of financial statements by introducing the concept of decision-usefulness, defined in A
Statement of Basic Accounting Theory. The purpose of accounting definitively shifted.
Financial statements were now intended ‘to provide information which will be of assis-
tance in making economic decisions.’ This purpose moved accounting practices toward
standardization and remains today as the primary purpose of standardized disclosure of
financial and non-financial information. See Section 2.3.2.
C. This is incorrect. The views of management are highly relevant to understanding the
factors that influence a company’s financial position, financial performance and prospects.
However, they are a component of financial disclosure needed to promote the understand-
ing of sustainability-related financial information, not an objective of financial accounting.
See Section 4.3.1.1.
D. This is incorrect. Country-level, or jurisdiction-level, accounting practices contributed to
global fragmentation of accounting and disclosure practices. Global accounting standards
today seek to create consistency across jurisdictional disclosure. See Section 2.3.3.
27. This question evaluates Learning Objective 3.

A. This is incorrect. While the MD&A does require companies to disclose and discuss
KPIs, including ‘non-financial performance indicators,’ neither the IFRS Management
Commentary nor the US SEC’s MD&A provide detail regarding which sustainability metrics
to report. See Section 4.3.1.1.
B. This is CORRECT. Both the Management Commentary and MD&A require companies
to generate a narrative that reflects management’s views and provides the necessary
context for interpreting companies’ future performance. This includes the disclosure of
‘forward-looking information’ and ‘known trends, events, demands, commitments, and
uncertainties.’ See Section 4.3.1.1.
C. This is CORRECT. As a key source of non-monetary information, both the Management
Commentary and MD&A provide a natural location to disclose material sustainability
information. See Section 4.3.1.1.
D. This is incorrect. Based on a 2017 project, the IASB recognized that, in the future,
Management Commentary requirements may become more rigorous as it seeks to provide
‘insight into the company’s strategy for creating shareholder value over time, its progress in
implementing it, and the potential impact on future financial performance not yet captured
by the financial statements.’ However, neither the IASB nor US SEC currently specify the
level of rigor of management’s narrative, nor do they identify the extent to which strategy
should be discussed. See Section 4.3.1.1.
28. This question evaluates Learning Objective 13.

A. This is CORRECT. As a senior officer within a company, the Chief Sustainability Officer
typically provides important perspective on the financial materiality of sustainability infor-
mation, important metrics for internal and external reporting and how sustainability-related
risks and opportunities should be managed. See Section 14.1.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

B. This is incorrect. Risk management often provides a company-wide perspective on the

internal and external risks faced by a firm and the application of resources to minimize,
monitor and control potential impacts that negatively affect firm value and impact strategic
planning. See Section 14.1.
C. This is CORRECT. As senior officers within a company, the Chief Executive Officer (CEO)
and Chief Financial Officer (CFO) also typically provide important perspective on the mate-
riality of sustainability information, important metrics for internal and external reporting and
how sustainability-related risks and opportunities should be managed within the context
of other executive responsibilities. See Section 14.1.
D. This is CORRECT. As the governing body responsible for building shareholder value and
investor confidence in the organization’s performance (among other responsibilities), the
Board of Directors can provide important perspective on the materiality of sustainability
information, important metrics for internal and external reporting and how sustainability-re-
lated risks and opportunities should be managed. See Section 14.1.
E. This is incorrect. Legal counsel typically provides perspective on the legal risks related to
the omission or inclusion of information in public documents but is typically not involved
in determining what sustainability-related risks and opportunities affect the company’s
financial performance or how those risks and opportunities should be managed. Their
counsel informs risk management and decision-making to fulfill duties of care. See Section
14.1.
F. This is incorrect. Technology typically provides perspective on the information architecture
that supports reliable, accurate and complete reporting, among other responsibilities. See
Section 14.1.
29. This question evaluates Learning Objective 16.

A. This is incorrect. It is true that implementing risk response is an important component of

linking financial performance with sustainability-related risks, which in turn is important to
link the management of sustainability-related risks and opportunities to broader strategy.
Responding to risks takes place after the risk is identified, assessed and prioritized. This
answer is incorrect because, in nature, it is a response to risk and not a means to identify
positive impacts. See Section 14.5.5.
B. This is incorrect. Board-level risk oversight assesses the effectiveness of risk management
processes and monitors the most significant risks faced by the company. Corporate boards
typically do not oversee risk mitigation at the unit level. See Section 14.3.2.
C. This is CORRECT. Guidance published by COSO and WBCSD identifies strategy and
objective setting for sustainability-related risk as an important component of integrating
sustainability-related risks and ERM. A strong understanding of business context, strategy
and objectives anchors all ERM activities. Applying ERM to sustainability-related risks
includes examining value creation processes to understand impacts and dependencies
in the short, medium and long term. See Section 14.5.5.
D. This is CORRECT. Guidance published by COSO and WBCSD identifies information,
communication and reporting for sustainability-related risk as an important component of
integrating sustainability-related risks and ERM. This includes cross-functional communica-
tion to identify the most appropriate information to support risk-informed decision making.
See Section 14.5.5.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

30. This question evaluates Learning Objective 8.

A. This is incorrect. Disclosure Topics are tailored versions of the G.I.C.s that are reasonably
likely to affect the financial performance of companies in an industry. In other words,
though the same G.I.C. will appear across industries, the Disclosure Topics within that
category will be different because they are industry specific. In the example above, the
disclosure topics for the Toys & Sporting Goods, Drug Retailers, Meat, Poultry & Dairy
and Processed Foods industries are different, even though they fall within the same G.I.C.:
Product Quality & Safety. See Section 10.3.1.1.1.
B. This is incorrect. While it is true that Disclosure Topics manifest differently across indus-
tries, disclosure topics are not determined based on a company’s external impacts. As
explained in Section 10.3.1.1.2., disclosure topics are linked to financial effects for compa-
nies in a given industry. Further, the table in this question does not give any insight into
how disclosure topics are determined. In other words, this answer does not represent a
conclusion that can be reasonably determined based on the level of information provided.
See also Section 10.3.1.1.1.
C. This is incorrect. In the SASB Standards, a G.I.C. is an industry-agnostic and cross-cutting
theme that allows comparison across industries. See Section 10.3.1.1.1.
D. This is CORRECT. Each disclosure topic reflects the industry-specific manifestations of
a G.I.C. While all disclosure topics can be categorized according to G.I.C. (which are
sustainability themes that cut across industries), they manifest differently depending on
what topic is reasonably likely to affect the financial performance of companies in a given
industry. The topic used to measure Product Quality & Safety in the Toys & Sporting Goods
industry will be different from the topic used to measure Product Quality & Safety in the
Drug Retailer industry because the way these general issues manifest, and the channels
through which they affect financial performance, differ as a result of different business
models, legal environments, and other factors. See Section 10.3.1.1.1.
31. This question evaluates Learning Objective 14.

A. This is CORRECT. As no company operates in isolation, companies can benefit from

observing their peers to better understand their reporting environment and inform deci-
sions about how, when and where to disclose. Companies may choose to look at such
things as what channels peers are using to disclose, what metrics they are benchmarking
and analyzing, which sustainability issues are frequently included in disclosure and so on.
See Section 14.2.2.
B. This is incorrect. While most companies filing an annual report rely on a disclosure
committee, the assemblage of a committee is not directly related to a company’s ability
to understand their reporting environment. Disclosure committees can help bring import-
ant perspectives together and maintain the integrity of internal controls—a function that
primarily serves to facilitate internal disclosure logistics rather than focusing on external
disclosure environment. See Section 14.2. and 14.4.1.
C. This is incorrect. The process of engaging and monitoring stakeholders of any type is
associated with the key disclosure step of determining (and understanding) your reporting
audience. This is different from steps companies may take to understand their reporting
environment, which is characterized by disclosure processes, market trends, investor
statements, regulatory developments and other factors. See Section 14.2.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

D. This is incorrect. The process of engaging senior leadership contributes to the goal of
creating organizational buy-in within a company more than it contributes to a compa-
ny’s ability to understand their reporting environment. Effective sustainability disclosure
depends on collaboration across business units and hierarchies, and company leadership
can play an integral role in setting the tone from the top. While this is an important step
while preparing sustainability disclosure, it is functionally different from the process of
evaluating external reporting environment. See Section 14.2.
32. This question evaluates Learning Objective 15.

A. This is incorrect. A certification, or an executive certification, applies to public companies’

regulatory filings. Executive leadership must ‘certify’ the accuracy or completeness of
disclosed information to comply with disclosure regulations. This traditionally applied to
financial information, though sustainability disclosure in regulatory filings is often subject
to certification as well. See Section 14.3.2.2.
B. This is incorrect. An observation is not recognized as an assurance type at any level.
Common forms of assurance include audits, examinations, reasonable assurance, limited
assurance and reviews. See Section 14.3.2.3.
C. This is incorrect. Reviews, also called limited assurance, are a less-rigorous type of
assurance engagement relative to reasonable assurance and typical audits. They tend to
be more limited in scope and can be associated with a lower degree of confidence that
reported information is reliable. Reviews are not characterized by the type of information,
sustainability or otherwise, that might fall under the scope of the engagement. See Section
14.3.2.3.
D. This is CORRECT. As defined by the American Institute of Certified Public Accountants
(AICPA), ‘examinations are audit-level engagements designed to provide a high-level of
assurance on information other than historical financial statements.’ Examinations may
serve as an appropriate form of assurance for companies seeking to signal the reliability
of sustainability disclosure. See Section 14.3.2.3.
33. This question evaluates Learning Objective 2.

A. This is incorrect. The current global state of financial reporting standards—one charac-
terized by general consensus and alignment—was preceded by a long and contentious
history. From the 1930s to the early 2000s, various organizations representing the account-
ing profession debated the merit of standardization, grappled to define the fundamental
purpose of financial statements, and sought to address the fragmented state of financial
accounting and disclosure practices. See Section 2.3.
B. This is CORRECT. The recognized purpose of financial disclosure and the accounting
methodologies in use have changed significantly throughout history. In the 1930s, histor-
ical cost accounting served as the dominant method, embedding a focus throughout the
profession on recording accurate information. In subsequent years, the profession began
to allow companies to practice multiple accounting methods, creating tension between
non-standardized methods and reducing the usefulness of disclosed information to
providers of capital. After much debate throughout the 1950s and 1960s, the accounting
profession coalesced around a new purpose for financial accounting—to provide informa-
tion to support economic decision-making. See Section 2.3.2.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

C. This is incorrect. In the mid-1900s, multiple accounting methods were recognized under
GAAP. Under this system, companies had the flexibility to choose to disclose information in
the manner that best represented the business. However, the resulting body of information
available to investors and other providers of capital seeking to use it to make economic
decisions was less useful. See Section 2.3. Notably, the greater levels of standardization
observed by markets today do not preclude companies from disclosing additional infor-
mation where needed.
D. This is incorrect. While standardization produces more useful information for capital
markets, jurisdiction-level differences will continue to exist in the application and interpre-
tation of disclosure rules. As disclosure standards continue to evolve, standard-setters
must balance the benefits that flexible implementation affords reporting companies with
the usability of information for the broader market. See Section 2.3.3. and 9.3.3.
34. This question evaluates Learning Objective 2.

A. This is CORRECT. During this time, the purpose of accounting shifted from focusing solely
on historical accuracy to recognizing the importance of forward-looking information to
support economic decision making. With this shift, the accounting profession emphasized
discounted future cash flows as the most relevant way to assess the future value attributed
to a company’s assets and liabilities. See Section 2.3.2.
B. This is incorrect. Historical cost accrual is not a recognized accounting method in the FSA
Credential Level I curriculum. However, historical cost accounting was widely practiced
before the purpose of financial statements was redefined. Historical cost accounting
shaped the accounting profession in many ways, where accuracy and reliable record
keep remain paramount. See Section 2.3.1.
C. This is incorrect. Comparable company analysis is not a method discussed in the FSA
Credential Level I curriculum in relation to the history of disclosure and standardization.
D. This is incorrect. Positive screening is not an accounting method or valuation method. It
is a practice implemented by investors to prioritize or actively choose firms to invest in
based on certain criteria identified to drive value. It is widely used today in the context of
sustainability. See Section 15.2.2.2.
35. This question evaluates Learning Objective 10.

A. This is incorrect. By building the SASB Standards into the IFRS Sustainability Disclosure
Standards, the ISSB follows an industry-based approach to standard-setting to capture the
sustainability information that matters most to companies’ performance across industries.
The SASB Standards rely on the Sustainable Industry Classification System (SICS). While
companies that fall within the same industry have many characteristics in common, SICS
industries do not differentiate companies based on size or sources of revenue. See Section
9.4.1. and 10.3.1.1.3.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

B. This is incorrect. By building the SASB Standards into the IFRS Sustainability Disclosure
Standards, the ISSB follows an industry-based approach to standard-setting to capture
the sustainability information that matters most to companies’ performance across indus-
tries. The SASB Standards rely on the Sustainable Industry Classification System (SICS).
Companies in the same SICS industry face similar sustainability-related risks and oppor-
tunities, where the same sustainability issues are likely to affect financial performance.
However, companies in the same SICS industry do not necessarily perform at similar
levels. Furthermore, a sustainability or ESG rating may score companies based on similar
performance factors, but the industry itself does not determine sustainability performance.
See Section 10.3.1.1.3. and 5.2.2.
C. This is CORRECT. Companies that prepare disclosures in line with the IFRS Sustainability
Disclosure Standards are required to consider the SASB Standards. The SASB Standards
rely on the Sustainable Industry Classification System (SICS). Within the same SICS
industry, companies tend to operate in the same or similar legal environment, which often
determines the type of sustainability-related risks and opportunities faced by companies
in that industry. See Section 10.3.1.1.3.
D. This is CORRECT. Companies that prepare disclosures in line with the IFRS Sustainability
Disclosure Standards are required to consider the SASB Standards. The SASB Standards
rely on the Sustainable Industry Classification System (SICS). Within the same SICS
industry, companies tend to face similar growth and innovation opportunities, which often
determines the type of sustainability-related risks and opportunities faced by companies
in that industry. See Section 10.3.1.1.3.
36. This question evaluates Learning Objective 12.

A. This is incorrect. While it is true that in general companies are disclosing more sustain-
ability information than ever before (see Chapter 1), greater sustainability disclosure is not
directly related to greater stewardship and collaborative engagement between investors
and companies. Investors seek better, not necessarily more, sustainability information. See
Section 13.1.
B. This is incorrect. While an increase in voting participation and growing support for sustain-
ability-related proxy voting has been observed, the act of proxy voting is itself a form of
engagement, not a trend contributing to investors’ decisions to manage company boards
and leadership more actively. See Section 13.2.2.1.
C. This is CORRECT. When invested in an index fund, investors do not have the option to
respond directly to unfavorable company performance by selling shares. As a result, they
are incentivized to work with companies to meet common performance goals. See Section
13.2.1.
D. This is CORRECT. The growing focus on sustainability in the investment world means
that asset managers are playing a more active role in corporate governance. Investors
recognize the opportunity to enhance decision making processes with sustainability infor-
mation and are also subject to growing stewardship responsibilities, which encourage
collaborative engagement with companies’ boards and leadership related to sustainability
matters. See Section 13.2.2.
37. This question evaluates Learning Objective 14.

A. This is incorrect. Executive compensation is not a component of a company’s external

environment that typically impacts decisions about what, where and how to disclose
sustainability information. See Section 14.2.2.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

B. This is CORRECT. Regulatory requirements in the surrounding market may evolve, causing
a shift in the risks or opportunities associated with certain sustainability matters. An
awareness of changes to the surrounding regulatory environment can directly influence a
company’s decision about what information to disclose. See Section 14.2.2.
C. This is CORRECT. Peer comparison can help inform companies’ decisions regarding which
reporting channels to utilize and what information to disclose. It can also help companies
gain an understanding of its performance relative to other firms. See Section 14.2.2.
D. This is incorrect. While it is true that investor voting behavior surrounding environmental
and social issues has increased and earned record levels of support, it is not a component
of a company’s external reporting environment as defined in Section 14.2.2. Rather, voting
participation rates and support for sustainability-related proxy voting provides a way to
track changing investor views over time. See Section 13.2.2.1.
E. This is CORRECT. Non-investor stakeholders can play an important role in influencing
sustainability matters that can affect financial performance. For example, NGOs may call
attention to pressing issues and mobilize action among consumers, and others in a way
that impacts a company’s financial performance (see Section 5.2.4.2.). By keeping an
eye on such developments, companies can inform decisions about what information to
disclose. See Section 14.2.2.
38. This question evaluates Learning Objective 13.

A. This is incorrect. While legal counsel is often an important part of the sustainability
disclosure process (see Section 14.1.), including legal professionals with expertise in
specific sustainability matters does not necessarily translate to enhanced disclosure and
financial insights. Rather, it is the ability to work cross functionally across a diverse range
of stakeholders that often leads to these outcomes. See Section 14.1.1.
B. This is CORRECT. Cross-functional teams are typically required to effectively disclose
financial information. Similar, if not greater, cross-functional cooperation among profes-
sionals within an organization is often required to prepare sustainability-related financial
disclosures. This process can improve both disclosure for external audiences and produce
insight into the ways sustainability matters affect business outcomes to the benefit of
internal decision-making. See Section 14.1.
C. This is CORRECT. The disclosure of material sustainability information is typically not a
matter of starting from scratch. Existing processes for collecting, managing and measuring
data can often be expanded to include sustainability data. This too can improve both
disclosure for external audiences and produce insight into the ways sustainability matters
affect company performance for internal decision-making. See Section 14.1.
D. This is incorrect. The presence of a designated sustainability team within a company does
not necessarily translate to enhanced disclosure and related business outcomes. Rather,
it is the ability to work cross-functionally across a diverse range of stakeholders (including
sustainability professionals) that often leads to these outcomes. See Section 14.1.
39. This question evaluates Learning Objective 18.

A. This is incorrect. While investors may choose to incorporate climate information into DCF
models, there is not enough evidence in the question to suggest that this would specifically
benefit the pre-investment stage for fixed income investors.
B. This is incorrect. By definition, fixed income investors do not practice equity valuation. See
Section 15.4.2.1.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

C. This is incorrect. Fixed income analysis tends to focus more on risk and less on upside
return potential, given the nature of debt securities (see Section 15.4.2.1.). Furthermore,
the duration of the team’s analysis depends on many factors. There is not enough evidence
provided in the question to conclusively support a short-term focus.
D. This is CORRECT. Fixed income investing often focuses on risk assessment, or evaluating
the likelihood that a company will not be able to repay borrowed funds. ESG information
can be highly additive to the risk assessment process. The pre-investment stage often
focuses on surfacing relevant sustainability matters. See Section 15.4.2.1.
40. This question evaluates Learning Objective 18.

A. This is CORRECT. Sustainability-related risk analysis for fixed-income often requires a

relatively high level of granularity because the risks present at the security level (in this
case, the bond level) may be very different than the sustainability-related risks faced by the
company as a whole. By understanding the differences between the geographic regions
these bonds support, the investor would gain a more complete understanding of risk
associated with the various bonds. See Section 15.4.3.3.
B. This is incorrect. While market-level analysis may support the investment decision in this
case, it is not unique to fixed income. See Section 15.4.3.3.
C. This is incorrect. While sector-level analysis might help support the investment decision
in this case, it is not unique to fixed income and likely would not lead to an understanding
of the differentiated levels of risk attributed to the various bonds. See Section 15.4.3.3.
D. This is incorrect. While industry-level analysis might help support the investment decision
in this case, it is not unique to fixed income and likely would not lead to an understanding
of the differentiated levels of risk attributed to the various bonds. The risk profile of the
bond for a specific region may or may not track the risk profile of the Agricultural Products
industry as a whole. See Section 15.4.3.3.
41. This question evaluates Learning Objective 19.

A. This is incorrect. Sustainability linked bonds are an instrument used in debt markets, not
equity. See Section 15.2.2.2. and 15.4.2.1.
B. This is incorrect. Tilts are commonly applied to index funds, not private equity portfolios.
See Section 15.5.1.
C. This is incorrect. Investors typically assess sustainability-related financial disclosures to
understand how a company’s management of sustainability-related risks or opportunities
can affect the value of an investment. Company’s compliance with jurisdictional financial
disclosure requirements such as GAAP has no relation to sustainability-integrated invest-
ment analysis.
D. This is CORRECT. In private equity as well as other asset classes, the Standards can be
used throughout the various stages of the investment cycle, including engagement. As
investors that often take a majority-control stake and have longer investment horizons,
private equity investors tend to engage with investees on a more frequent and robust
basis. The Standards serve as a helpful tool for informing ongoing engagement on the
sustainability matters that affect financial performance and prospects. See Section 15.6.2.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

42. This question evaluates Learning Objective 4.

A. This is CORRECT. The concepts of ‘misstatements, omissions and obscurement’ are

central to our definition and understand of materiality applied in the context of corporate
disclosure and capital markets. The concept of ‘misstatements’ exists to ensure preparers
provide accurate information. Information can be ‘materially misstated’ if it is incorrect or
otherwise inaccurate. See Section 3.2.3.1.
B. This is incorrect. The concepts of ‘misstatements, omissions and obscurement’ are central
to our definition and understanding of materiality applied in the context of corporate
disclosure and capital markets. This option describes the concept of ‘obscurement.’ See
Section 3.2.3.3.
C. This is incorrect. This option describes the concept of faithful representation, which is a
fundamental qualitative characteristic of useful sustainability-related financial information.
It is not a concept relevant to ‘materiality.’ See Section 9.5.1.1.
D. This is incorrect. The concepts of ‘misstatements, omissions and obscurement’ are central
to our definition and understanding of materiality applied in the context of corporate
disclosure and capital markets. This option describes the concept of ‘omissions.’ See
Section 3.2.3.2.
43. This question evaluates Learning Objective 8.

A. This is incorrect. While ‘governance’ is one of the core content areas of the IFRS
Sustainability Disclosure Standards, ‘climate,’ ‘KPIs,’ and ‘Connected information’ are not.
See Section 10.1.
B. This is incorrect. While ‘metrics and targets,’ ‘strategy,’ and ‘governance’ are all core
content areas of the IFRS Sustainability Disclosure Standards, ‘environmental impacts’ is
not. See Section 10.1.
C. This is CORRECT. There are four core content areas of the IFRS Sustainability Disclosure
Standards: ‘governance, strategy, risk management, and metrics and targets.’ The four
content areas are directly derived from the TCFD Recommendations. See Section 10.1.
D. This is incorrect. While ‘metrics and targets,’ ‘risk management,’ and ‘governance’ are all
core content areas of the IFRS Sustainability Disclosure Standards, ‘carbon’ is not. See
Section 10.1.
44. This question evaluates Learning Objective 9.

A. This is CORRECT. When the need for a potential standard-setting project has been iden-
tified, the ISSB publishes a public discussion document—which may take the form of
a discussion paper, request for information (RFI) or research paper designed to elicit
comments from interested parties— and opens a public consultation. This occurs during
research and project screening. Documents for public consultation are also released when
proposing a new standard or update to an existing standard. If the project advances and
when agreement is established on the technical matters of the proposal, staff prepare and
present an exposure draft, which constitutes the official proposed update to the Standards.
The proposal then undergoes a balloting process wherein Board members indicate their
approval or disapproval of the issuance of the exposure draft via written ballot. If the
exposure draft has supermajority support, it is released for public consultation along with
supporting communications, inviting important stakeholders and the public to submit
comments. See Section 11.2.2.

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FSA CREDENTIAL LEVEL I STUDY GUIDE SAMPLE QUESTIONS

B. This is incorrect. It is possible for the ISSB to decide to re-expose proposals during the
redeliberation and publication stage, however it is not characteristic of this stage. The
post-implementation review stage of standard-setting does not include public consultation.
See Section 11.2.2.
C. This is incorrect. Effects analyses are published when new or updated standards are
published. Effects analysis documents describe the likely benefits and costs associated
with a Standard. See Section 11.2.2.
D. This is incorrect. ‘Technical readiness assessment’ is not one of the four stages of the ISSB
standard-setting process. See Section 11.2.2.
45. This question evaluates Learning Objective 3.

A. This is incorrect. The IOSCO voiced support for the formation of the ISSB, however, as the
global organization of securities regulators, it did not make the decision to consolidate
entities. See Section 6.4.
B. This is CORRECT. In response to widespread confusion and the market threats posed
by increasing global fragmentation, companies, investors and other key stakeholders
expressed their demand for a simplified system of investor-focused sustainability disclo-
sure. As a result, a series of consolidations took place to eventually form the ISSB. See
Section 6.4.
C. This is incorrect. The organizations that consolidated to form the ISSB, including the CDSB,
IIRC and SASB by way of the Value Reporting Foundation are all non-profit organizations
that developed sustainability disclosure standards or frameworks in the public interest.
The formation of the ISSB was a response to market demand, not an attempt to improve
profits. See Sections 6.1. and 6.4.
D. This is incorrect. While it is true that the ISSB was formed in response to market demand,
that demand was for simplified investor-focused reporting. Fragmented information
poses specific risks to capital markets, such as reduced efficiency and price discovery.
Sustainability-related impacts are typically relevant to a wide range of stakeholders, which
can include investors but also includes customers, civil society organizations, employees
and others. Section 6.4. and 7.3.3.

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FSA CREDENTIAL LEVEL I STUDY GUIDE GLOSSARY

GLOSSARY OF
KEY TERMS
Accurate: A characteristic of information within general-purpose financial reports that states that
information is free from material error, descriptions are precise, and estimates, approximations
and forecasts are identified.

Activity metrics: Metrics used to quantify the scale of a business. They are used in conjunction
with accounting metrics to normalize data and facilitate comparison.

Alliance organizations: A formal association formed for the mutual benefit of member organiza-
tions in association with specific shared interests or goals. Member organizations benefit from a
communication network, shared resources and collaboration.

Alpha: The return on an investment in excess of a market index or benchmark.

Assurance readiness: Assessed through internal audits or other internal disclosure procedures,
a process that seeks to determine the appropriate level of external assurance and overall pre-
paredness of a company to smooth the assurance process and control related assurance expens-
es.

Assurance: A service performed by external, independent professional(s) to declare the credibil-

ity of disclosed data, statements and other information, typically accompanied by an assurance
report and/or assurance statement.

Audit committee: A committee of the board of directors within a company charged with oversee-
ing general purpose financial reporting, including sustainability-related financial disclosure, and
the internal and external audit process.

Audits: An official, independent examination of an organization’s financial and/or non-financial

statements to ensure they fairly and accurately represent the transactions and activities of the
company.

Basis for conclusions: A document published by a standard-setting body that summarizes con-
siderations in developing standards, including exposure drafts. It includes the rationale for accept-
ing or rejecting particular changes to a given standard.

Benchmarks: 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.

Capital markets: The markets in which debt and equity-backed securities (such as stocks, bonds
and other financial securities) are purchased and sold. In simple terms, capital markets connect
those with financial capital to invest with those seeking capital.

Certifications: For public companies, the process performed by the CEO and/or CFO to verify
and sign off on the accuracy and completeness of disclosed information.

Coalitions: A formal group of companies and organizations formed, sometimes temporarily, in

pursuit of combined action toward a specific outcome. Coalition members often collaborate and

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FSA CREDENTIAL LEVEL I STUDY GUIDE GLOSSARY

GLOSSARY OF KEY TERMS (CONT.)

collectively communicate goals and developments related to the particular topic (e.g., The Sustain-
able Apparel Coalition, Sustainable Packaging Coalition, etc.).

Comparative analysis: Often part of fundamental analysis, a form of analysis used to compare
industry peers or security values to assess their intrinsic value, which may or may not be accu-
rately reflected by market capitalization or stock prices.

Complete: A characteristic of information in general purpose financial reports that states the
information includes all details necessary for users to understand a concept or matter at hand. In
the context of sustainability disclosure, completeness applies to information that depicts a specific
sustainability-related risk or opportunity.

Comply-or-explain: Provisions that require disclosure of particular information, but allow prepar-
ers to omit the information and provide an explanation for the omission.

Conceptual framework: A document that defines the principles and characteristics of the stan-
dard-setting process, ensuring all standards are developed consistently, providing a framework to
resolve questions that emerge throughout the standard-setting process, and allowing users of the
standards to understand the process and have confidence in the quality of the standards.

Confirmatory value: A characteristic of information in general purpose financial reports that

states the information can be used to confirm or change a user’s previous evaluations.

Corporate governance codes: Rules, either mandatory or voluntary, that define standards and
responsibilities for corporate boards to protect shareholder investments, including standards for
ethical behavior and responsible decision making.

Cost of capital: The cost of a company’s funds, including both debt and equity. From an inves-
tor perspective, cost of capital refers to the returns expected by those who provide capital to the
business.

Credit risk: The risk of a borrower defaulting on its ability to make required repayments (interest
or principal) resulting in a loss to the lender.

Data providers: For-profit companies that provide data-related products and services to inves-
tors, often aggregated datasets, analytics platforms, or ratings.

Decision-usefulness: In accounting, a concept that states that the information in financial state-
ments can be used to form educated opinions and qualified decisions with respect to a company.

Disclosure platforms: A software-based interface that supports sustainability report preparation

and disclosure by establishing workflows and supporting data management.

Disclosure topics: In IFRS S1 Industry-based Guidance and the SASB Standards, the indus-
try-specific topics that represent sustainability-related risks and opportunities. Metrics are used to
measure company performance on a disclosure topic.

Discussion and analysis metrics: In IFRS S1 Industry-based Guidance and the SASB Stan-
dards, narrative data used to explain processes, practices, risks and past events, or to otherwise
provide important context to quantitative metrics.

Effects analysis: In the IASB and ISSB standard-setting process, an analysis published by the

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FSA CREDENTIAL LEVEL I STUDY GUIDE GLOSSARY

GLOSSARY OF KEY TERMS (CONT.)

standard-setting board describing the likely benefits and costs associated with a Standard, under-
taken as new requirements are developed.

Enterprise Risk Management (ERM): As defined by COSO, ‘the culture, capabilities and practic-
es, integrated with strategy-setting and performance, that organizations rely on to manage risk in
creating, preserving and realizing value.’

Enterprise value: A measure of a company’s total market value, representative of the amount of
money needed to purchase the company. Enterprise value (EV) is calculated by adding market
capitalization to short-term and long-term debt, then subtracting all cash and cash equivalents.

Equity: In accounting, the difference between a company’s liabilities and assets on the balance
sheet. Equity investments are those made by purchasing shares in a company, which represent an
ownership stake.

ESG integration: An investment strategy that uses sustainability information to evaluate and/or
enhance the financial returns of a given investment opportunity.

ESG ratings and analytics providers: Organizations that use proprietary methods for scoring
and ranking companies based on sustainability performance factors.

Estimation uncertainty: A measure used to indicate how uncertain a preparer of general pur-
pose financial reports is in the precision of an estimate, as well as the source of uncertainty.

Examinations: As defined by AICPA, examinations are audit-level engagements designed to

provide a high level of assurance on information other than historical financial statements.

Exclusionary screening: An investment process that intentionally avoids or ‘screens out’ invest-
ments based on particular criteria.

Exposure draft: Within the standard-setting process, a document published to solicit public com-
ment on standard-setting activities and new accounting and disclosure standards.

Externalities: An economic concept that refers to situations where the production or consumption
of a good or service impacts (positively or negatively) a third party or its surrounding environment.
Externalities are not reflected in the price of the goods or services provided by the company. For
example, water pollution caused by a manufacturing plant may reduce local fish populations and
harm the livelihood of nearby fisherman, though the company does not ‘internalize’ the cost of fish
stock losses.

Fair presentation: A characteristic of general purpose financial reports that requires preparers
to depict information in a way that completely and accurately reflects the financial position and
performance of a company.

Fiduciary duty: The legal and ethical responsibility of a professional to act in the best interest of
another person, entity or client.

Financed emissions: As defined in IFRS S2, ‘the portion of gross greenhouse gas emissions
of an investee or counterparty attributed to the loans and investments made by an entity to the
investee or counterparty. These emissions are part of Scope 3 Category 15 (investments) as de-
fined in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Report-
ing Standard (2011).’

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FSA CREDENTIAL LEVEL I STUDY GUIDE GLOSSARY

GLOSSARY OF KEY TERMS (CONT.)

Fixed income: A debt-based instrument whereby investors loan money to a company in return
for a pre-determined number of interest payments (in addition to principal repayment) until the
security’s maturity date. The interest rate depends on the creditworthiness of the borrower. Fixed
interest payments provide a fixed stream of income to the investor. Bonds are the most common
fixed-income instrument.

Frameworks: A set of concepts and principles that dictate how information is structured and pre-
pared, and what broad topics are covered.

Fundamental analysis: A type of analysis that aims to evaluate the intrinsic value of an asset or
security by examining relevant financial and economic factors. Fundamental analysis attempts to
determine if a security is undervalued or overvalued relative to its market price.

Gap analysis: The comparison of actual levels of data collection with the desired level of data
collection to determine what data a company must gather and what internal processes must be
changed or implemented in order to meet disclosure goals or requirements.

General Partner (GP): An investor who jointly owns and manages a business. The General Part-
ner may have unlimited liability, and typically brings specialized knowledge and skills to contribute
to the business.

Generally Accepted Accounting Principles (GAAP): The standards that set approved account-
ing methods and practices, including the rules that dictate the legality of publicly-filed financial
statements. GAAP improves the comparability, consistency and reliability of the communication of
financial information.

General purpose financial reports: As defined in IFRS S1, ‘reports that provide financial
information about a reporting entity that is useful to primary users in making decisions relating to
providing resources to the entity. Those decisions involve decisions about: (a) buying, selling or
holding equity and debt instruments; (b) providing or selling loans and other forms of credit; or (c)
exercising rights to vote on, or otherwise influence, the entity’s management’s actions that affect
the use of the entity’s economic resources. General purpose financial reports include—but are not
restricted to—an entity’s general purpose financial statements and sustainability-related financial
disclosures.’

GP reporting: The process whereby a General Partner reports information (financial and other)
to Limited Partners, usually through quarterly reporting packages and including both financial and
narrative information.

Great Depression: The worldwide economic downturn which began in 1929. Largely understood
as the worst depression in the 20th century, the event was first marked by a dramatic fall in stock
prices, triggering devasting effects on personal income, prices, job opportunities and international
trade around the world.

Historical cost accounting: An accounting method where assets are reported according to the
original nominal monetary value of the asset.

Impact investing: An investment strategy that aims to create positive impact alongside financial
returns. An impact investor has (1) the intention to achieve positive social or environmental impact,
(2) measures and reports impact data, and (3) uses impact data to inform decisions with the goal
of mitigating negative impacts, maximizing positive outcomes and generating financial returns.
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FSA CREDENTIAL LEVEL I STUDY GUIDE GLOSSARY

GLOSSARY OF KEY TERMS (CONT.)

Impact materiality: In sustainability disclosure, an approach to materiality that captures an orga-

nization’s impacts, both positive and negative, on people and the environment. Impact materiality
is defined within the ESRS and GRI Standards.

Impairment calculations: 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 depreciates in excess
of its book value.

IFRS Advisory Council: A group that provides strategic advice to the IFRS Foundation Trustees,
the IASB and ISSB.

IFRS Foundation Trustees: The governance body that oversees and governs the IFRS Founda-
tion.

IFRS Foundation Monitoring Board: The governance body comprised of globally representative
capital markets authorities that oversees the IFRS Foundation Trustees to enhance public ac-
countability.

Index fund: A type of exchange-traded or mutual fund where its portfolio is constructed to match
or track the performance of a particular market index, such as the S&P 500.

Industry-agnostic: Disclosure guidance (and the information yielded through that guidance) that
aims to capture performance on a set of criteria that can be ubiquitously applied to any company,
regardless of the industry in which it operates.

Industry analysis: A type of analysis used to understand a company’s position relative to industry
peers and the forces that influence the industry as a whole.

Industry associations: A formal organization founded by and comprised of companies in the

same industry, organized to support common interests.

Industry classification system: A standardized method for categorizing and organizing econom-
ic activities based on certain criteria. These systems are designed to group similar businesses
and economic activities together to facilitate analysis, comparison and reporting.

Industry-specific: Disclosure guidance (or information yielded through that disclosure guidance)
that captures information that is relevant to companies in a specific industry.

Information validation pathways: Digital information procedures and testing processes used to
consistently ensure the integrity and security of digitally-reported data.

Institutional investors: An entity that pools money to buy, sell and manage investment securi-
ties on behalf of its clients. Institutional investors may include banks, insurance companies, large
investment funds such as mutual or hedge funds, pension funds and others. Due to their size,
institutional investors can have significant influence on the market.

Intangible assets: An asset that is non-monetary and not physical in nature, but is identifiable
and has value to a business. Intellectual property, goodwill, reputation and other assets related to
sustainability are intangible assets.

Interest rate risk: The risk of an investor experiencing losses because of a change in overall
interest rate, which reduces the value of a fixed-income security.

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Internal controls: In the context of accounting and auditing, internal controls are the processes,
rules and mechanisms in place to ensure the efficiency, integrity and reliability of reported data.

Interpretive guidance: Official disclosure guidance that clarifies or elaborates on the application
of existing accounting and disclosure standards.

Limited assurance: A less-rigorous form of assurance that is limited in scope and associated
with a lower degree of confidence in the reliability of reported information.

Limited partner (LP): A private equity investor with limited liability. LPs are liable up to the full
amount of the capital they invest. LPs do not take part in the company’s or fund’s active manage-
ment.

Line items: In accounting, a line item is a distinct entry that appears on a separate line in a bud-
get, financial statement or bookkeeping ledger. Traditional examples include revenue and adminis-
trative expenses.

Liquidity risk: 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(s) into cash without incurring
a loss.

Management Commentary: As defined in IFRS Practice Statement 1, ‘…a narrative report that
provides a context within which to interpret the financial position, financial performance and cash
flows of an entity. It also provides management with an opportunity to explain its objectives and
its strategies for achieving those objectives. Users routinely use the type of information provided
in management commentary to help them evaluate an entity’s prospects and its general risks, as
well as the success of management’s strategies for achieving its stated objectives…’

Management’s Discussion and Analysis (MD&A): The section in a public company’s annual
and/or quarterly report that presents the analysis and opinions of management and executives of
the company’s performance, including a discussion of risks, opportunities, trends, future plans,
key performance indicators and other relevant qualitative and quantitative information.

Negative screening: In investing, a process used to avoid or eliminate certain investments based
on specific criteria.

Neutral: A characteristic of information in general purpose financial reports that states that infor-
mation is not biased, selected or manipulated in a way that makes the information more or less
likely to be interpreted favorably.

Non-government organization (NGO): An organization that operates independently of any gov-

ernment, and exists to address social, environmental or political issues.

Non-GAAP measures: Financial performance measures that do not align with GAAP rules.

Normalization: The process of adjusting and/or organizing data to enable effective comparison
and analysis.

Norms-based screening: An investment process that intentionally avoids or ‘screens out’ invest-
ments based on a target company’s behavior regarding internationally accepted norms or stan-
dards surrounding human rights, labor practices or other issues.

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Performance metrics: Data that represents a company’s activities that are used to evaluate
success. Sometimes called key performance indicators (KPSs), performance metrics are typically
quantitative.

Physical risk: As defined in IFRS S2, climate-related physical risks include ‘risks resulting from
climate change that can be event-driven (acute physical risk) or from longer-term shifts in climatic
patterns (chronic physical risk)…These risks could carry financial implications for an entity, such
as costs resulting from direct damage to assets or indirect effects of supply-chain disruption. The
entity’s financial performance could also be affected by changes in water availability, sourcing
and quality; and extreme temperature changes affecting the entity’s premises, operations, supply
chains, transportation needs and employee health and safety.’

Positive screening: An investment strategy that intentionally selects or prioritizes

Predictive value: A characteristic of information in general purpose financial reports that states
the information can be used to predict future outcomes.

Price volatility: The amount and frequency of price changes to a security over time, usually mea-
sured in relation to mean price.

Primary users: As defined in IFRS S1, existing and potential investors, lenders and creditors.

Principles-based: In accounting, principles-based disclosure guidance defines a set a principles

(such as ‘understandable’ or ‘relevant’) that must be followed when reporting financial information.

Private equity: A form of investing whereby investors directly invest in private companies and
engage in company buyouts rather than investing through public exchanges.

Provisional standards: Standards that are in a temporary or preliminary state, released to signal
directionality and to solicit input with the understanding that the standards will undergo additional
review before finalization.

Reasonable assurance: A rigorous level of assurance that involves review of internal controls
and mitigates the risk of material misstatements.

Renewable portfolio standards: Policies designed to increase the use of renewable energy by
requiring the production of energy from wind, solar, biomass, geothermal and other sources, usu-
ally as a percentage of overall energy production.

Reporting entity: As defined in IFRS S1, ‘an entity that is required, or chooses, to prepare gener-
al purpose financial statements.’

Retail investor: A nonprofessional investor, usually an individual, who buys and sells securities
for their personal investment portfolio.

Review: See ‘Limited assurance.’

Rules-based: In accounting, a rules-based system details the specific, standardized processes

that must be followed when reporting financial statements, often enforced by regulators.

Screens: Choosing assets based on their ability (or inability) to meet pre-defined criteria. They
can be positive, where assets are included based on the specific criteria, or negative, where as-

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FSA CREDENTIAL LEVEL I STUDY GUIDE PART III: UNDERSTANDING IFRS SUSTAINABILITY DISCLOSURE STANDARDS
GLOSSARY

GLOSSARY OF KEY TERMS (CONT.)

sets are avoided based on specific criteria.

Securities exchanges: A marketplace where securities such as stocks, bonds or other deriva-
tives in listed companies are purchased and sold. Exchanges offer a neutral, regulated platform
where companies, investors and brokers can make investments.

Sell-side analysts: An 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: First introduced by the Harvard Business Review article Creating Shared Value by
Michael Porter and Mark Kramer, 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.’

Shareholder resolutions: A proposal submitted by shareholders that provides a request or

recommendation to the board of directors of a public company. Shareholders may vote on the
resolution at the company’s annual meeting unless it is withdrawn.

Socially Responsible Investing (SRI): An investing strategy that aligns with an investor’s values
and seeks to do social/environmental good.

Software providers: Typically for-profit companies that offer computer-based programs to

streamline and improve sustainability data collection, monitoring and reporting. Software provid-
ers can help improve data consistency, efficiency, and reliability through validated and sometimes
automated information pathways.

Sources of guidance: The required and optional resources designated in IFRS S1 which pre-
parers can refer to in order to identify sustainability-related risks and opportunities and material
information related to those risks and opportunities.

Standards: A set of specific, replicable and detailed guidance for what information should be
disclosed.

Stewardship codes: Rules adhered to by institutional investors that set standards and expec-
tations for transparency, shareholder rights and investee engagement. Stewardship codes often
articulate investor responsibilities for promoting sustainable growth and enhancing value in the
medium and long term.

Strategic planning: 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.

Structured data: Data that follows a pre-defined format with clearly defined data types, such as
Excel files of SQL databases.

Suitable criteria: The basis of information used by assurance practitioners in an assurance

engagement to consistently evaluate subject matter. Suitable criteria are required to meet interna-
tional standards for assurance engagements.

Sustainable business strategy: A company’s plan to proactively improve firm performance by

managing the monetary and non-monetary factors that impact its ability to create value over the

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long term.

Sustainability strategy: A company’s approach for improving performance on one or more sus-
tainability topics.

Sustainability-related financial disclosures: As defined in IFRS S1: ‘a particular form of general

purpose financial reports that provide information about the reporting entity’s sustainability-related
risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its ac-
cess to finance or cost of capital over the short, medium or long term, including information about
the entity’s governance, strategy and risk management in relation to those risks and opportunities,
and related metrics and targets.’

Systematic or market risk: Systematic risk, also called market risk, refers to the type of risk in-
herent in the overall market that cannot be diversified away. For example, declines in value caused
by global recession.

Systemic risk: The risk of collapse of an entire financial system or an entire market related to
broad-reaching factors and an entity’s connections to these systems or institutions.

Target setting: The process of setting performance goals using measurable, timebound out-
comes for specific sustainability topics. Targets may be set according to individual firm priorities or
by local, regional or national policies or initiatives.

Technical Protocol: Accompanying a SASB Standard, a resource that provides guidance on

definitions, scope, implementation and presentation of associated metrics.

Thematic bonds: A fixed-income debt security used to finance projects that generate positive
social and environmental impact.

Thematic investing: An investment strategy whereby investors optimize capital allocation accord-
ing to a specific sustainability matter, such as carbon emissions reduction or water conservation.

Tilt: A method applied to an index fund wherein securities are added on top of the core portfolio to
skew the fund toward a specific performance goal.

Tracking error: The difference between the return an investment or portfolio generates and the
benchmark it was trying to imitate.

Transition risk: As defined in IFRS S2, climate-related transition risks include ‘risks that arise
from efforts to transition to a lower-carbon economy. Transition risks include policy, legal, techno-
logical, market and reputational risks. These risks could carry financial implications for an entity,
such as increased operating costs or asset impairment due to new or amended climate-related
regulations. The entity’s financial performance could also be affected by shifting consumer de-
mands and the development and deployment of new technology.’

Universal owner: Institutional investors whose portfolios encompass a significant portion of the
market, such that their returns depend on the health of the overall economy and investors take a
level of responsibility to align their interests with the wellbeing of the public.

Unstructured data: Data that is not organized in a pre-defined manner and typically does not fit
into a row-column format. Examples include images and video files.

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GLOSSARY OF KEY TERMS (CONT.)

Valuation: The process of determining the economic value of a company or security. Company
valuation may consider factors such as future earnings, management, capital structure, asset
value, risks and other factors.

Value chain: As defined in IFRS S1, ‘the full range of interactions, resources and relationships
related to a reporting entity’s business model and the external environment in which it operates.
A value chain encompasses the interactions, resources and relationships an entity uses and
depends on to create its products or services from conception to delivery, consumption and
end-of-life, including interactions, resources and relationships in the entity’s operations, such as
human resources; those along its supply, marketing and distribution channels, such as materials
and service sourcing, and product and service sale and delivery; and the financing, geographical,
geopolitical and regulatory environments in which the entity operates.’

Values-based screening: An investment strategy that intentionally avoids or includes invest-

ments based on their ability to meet specific criteria related to the ethical standards of the investor.

Variance: The quality of being different or inconsistent.

Withdrawal rates: 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: The risk of experiencing an unfavorable shift in interest rates, impacting the
price of fixed-income securities.

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