FSA Level II Exam with correct answer 2024

Three primary considerations for the sustainability profile of a company - answer-Social license to operate Use of common capitals Costs to society, or externalities Two main internal factors to determine if a company fits within the scope of a SICS industry - answer-Major revenue streams Main inputs for value creation External factors evaluated to determine which sustainability issues are relevant to performance - answer-Business climate Economic climate Regulatory environment Four pillars of ESG management - answer-Governance Strategy Risk management Performance metrics and targets Five broad sustainability dimensions - answer-Environment Social capital Human capital Business model & innovation Leadership & governance Environment general issue categories - answer-GHG emissions Air quality Energy management Waste & wastewater management Waste & hazardous materials management Ecological impacts Social capital general issue categories - answer-Human rights & community relations Customer privacy Data security Access & affordability Product quality & safety Customer welfare Selling practices & product labeling Human capital general issue categories - answer-Labor practices Employee health & safety Employee engagement, diversity & inclusion Business model & innovation general issue categories - answer-Product design & lifecycle management Business model resilience Supply chain management Materials sourcing & efficiency Physical impacts of climate change Leadership & governance general issue categories - answer-Business ethics Competitive behavior Management of the legal & regulatory environment Critical incident risk management Systemic risk management Energy management - answer-Issue captures a company's management of energy as a key input Ecological impacts - answer-Issue relevant to companies that use and modify significant areas of land as a main input for value creation Human rights & community relations - answer-Issue relates to the relationships between businesses and the communities in which they operate NOTE - unrelated to environmental impacts such as air pollution or waste Customer privacy - answer-Issue concerned with the management of risks related to the use of personally identifiable information (PII) Data security - answer-Issue lends insight into how a company protects data from being compromised by external threats Product quality & safety - answer-Addresses a company's ability to offer manufactured products and/or services that meet customer expectations with respect to their health and safety characteristics Customer welfare - answer-Addresses qualities inherent to the design and delivery of products and services in which customer welfare may be in question Product design & lifecycle management - answer-Issue relates to the potential for a company to drive value through product design & lifecycle management Business model resilience - answer-Issue lends insight into a company's ability to incorporate relevant social, environmental and political transitions into long-term business model planning Supply chain management - answer-Issue defined by the social and environmental externalities created by suppliers through their operational activities Materials sourcing & efficiency - answer-Issue aims to assess the resilience of materials supply chains to the impacts of climate change and other external environmental and social factors ESG Five Factors - answer-Direct financial impacts and risk Legal, regulatory and policy drivers Industry norms, best practices and competitive drivers Stakeholder concerns and social trends Opportunities for innovation Key sources of information for use in normalization - answer-Financial statements and reports SASB Standards Data regarding the operating context and conditions of the company Best basis of normalization for Environment dimension - answer-Revenue or production Best basis of normalization for Social Capital dimension - answer-Company output Helpful data point for normalization of Human Capital dimension - answer-Number of employees Best basis of normalization for Business Model & Innovation dimension - answer-Scale of company's operations or using financial measures Best basis of normalization for Leadership & Governance dimension - answer-Company's revenue Basic categories that most SASB activity metrics fall into - answer-Number of employees Amount of product sold Amount of asset use/size or capacity of asset Amount of assets owned versus leased or outsourced Three modes of comparison in traditional financial analysis - answer-Past performance Peer performance Benchmarks and targets Measures of central tendency - answer-Mean Median Mode Measures of variability - answer-Standard deviation Mean absolute deviation (MAD) Minimum and maximum variables Normal distribution percentages - answer-68.2% = one standard deviation of the mean 95% = two standard deviations of the mean 99.7% = three standard deviations of the mean Skewness - answer-Measure of symmetry/asymmetry of distribution in a dataset Negatively skewed - answer-Mean to the left of the median and mode Positively skewed - answer-Mean to the right of the median and mode Three main industry-level causes of skewness - answer-Underlying financial or operational characteristics of companies Industry-wide regulatory conditions Data characteristics such as performance floors and ceilings Ability of a user to apply tools for statistical analysis is only possible when ESG data: - answer-Covers many or most companies in an industry and is standardized so that it can be compared Reasons why companies produce a wide range of ESG metrics - answer-Support internal management Report to regulators Communicate to a broad range of stakeholders Three core discrepancies of the ESG data landscape - answer-Different measurements and metrics Difference in scope of information Different weightings of ESG factors Business climate factors related to a company's operating environment - answer-Competitive drivers Peer behavior, pricing power Technological innovation Expectations of key stakeholders Economic climate factors related to a company's operating environment - answer-Commodity prices Taxes, inflation and interest rates Regulatory climate factors related to a company's operating environment - answer-Current regulation Future regulation Enforceability and severity of penalties Things that company location determines - answer-Resource access and physical climate Economic and regulatory boundaries within which a company operates Exposure to environmental changes Availability of natural resources Local ecosystem changes SASB metric that measures a risk - answer-If higher metric values indicate threats to economic performance SASB metric that measures an opportunity - answer-If higher metric values indicate improved economic performance Actual impacts - answer-Actively affecting a company Potential impacts - answer-Not guaranteed to happen Three key characteristics of financial impacts - answer-Likelihood, timing, magnitude Near-term impacts - answer-Currently occurring or can occur at any time (e.g., current, non-operating losses) Medium- to long-term impacts - answer-Currently occurring with an expected duration of over one year (e.g., operating performance, systemic risk) Low-magnitude impacts - answer-Less severe effects on a company's financial statements or cost of capital at a given time, but effects may accrue over time (e.g., metrics related to everyday operations) High-magnitude impacts - answer-More significant effects on a company's finances or its cost of capital Acute impacts - answer-Typically high magnitude and low likelihood, direct and immediate impacts on market value Progressive impacts - answer-Typically low to high magnitude and high likelihood, occur gradually over time, often medium to long-term, considering operational costs of doing business DCF basic idea - answer-Value of an investment = present value of all future cash generated by the investment Three key inputs for DCF - answer-1. Components of cash flows during a forecast period 2. Calculation of the discount rate (WACC) 3. Prediction of the long-term growth rate to estimate the terminal value discounted to its present value Channels of financial impact - answer-1. Cash flows (revenues, expenses, assets, liabilities) 2. Cost of capital (cost of equity, cost of debt) 3. Growth projections ROIC basic idea - answer-efficiency measure that tells the user how well a company creates value with the capital that shareholders provide to the firm ROIC formula - answer-NOPAT / total invested capital When does a company earn a positive ROIC for a project - answer-When NOPAT exceeds capital expended Two questions to consider on if a company has a competitive advantage - answer-1. Does ROIC exceed cost of capital? 2. Is a company's ROIC higher than its peers? Consumer advantage - answer-Exists where customers habitually use a product or face high costs of searching for and switching to a new product Production advantage - answer-Exists where a company spends less to deliver its goods or services than its competitors Variables that can lend insight into the source of companies' competitive advantage - answer-NOPAT Sales Invested capital What NOPAT/Sales tells us - answer-operating profit = consumer advantage What Sales/Invested capital tells us - answer-turnover ratio = production advantage What EVA tells us - answer-Measures the profit a company is able to generate above the rate of return required by providers of capital in monetary terms, helps corporate managers and investors attribute returns to specific decisions about how a company is deploying capital and managing resources EVA formula - answer-(ROIC - WACC) x Invested capital Channels of financial impact that may warrant adjustments to traditional EVA - answer-1. Cash flows (revenue, increases where net operating profits increase and expenses, affects ROIC where costs both contribute to and detract from net profit) 2. Growth rate 3. Cost of capital Scenario analysis - answer-Process of analyzing various reasonable future scenarios to understand possible outcomes, estimating changes to future cash flows and the discount rate as captured by cost of capital Typical scenario analysis steps - answer-1. Identify and assess sustainability-related risks and opportunities 2. Define the scenarios 3. Evaluate business impacts 4. Assess and report actual outcomes relative to modeled scenarios 5. Identify and recommend potential courses of action Two types of scenarios in scenario analysis - answer-1. Exploratory = set of possible future states and range of options 2. Normative = plan for specific performance target or preferred future outcome Ways that SASB Standards inform scenario analysis - answer-1. Identify and assess material risks and opportunities 2. Define the scope of analysis and parameters that define various scenarios 3. Evaluate the impact of sustainability performance on financial performance and operating results 4. Measure performance against baselines established by modeled scenarios 5. Inform strategic decisions and courses of action based on results of analysis