Sustainable Finance in Education

Abstract

Notwithstanding the highly laudable efforts of the Principles for Responsible Investment and other Environmental, Social, and Corporate Governance (ESG)-related trade groups and organisations, Responsible Investment (RI) has still to be mainstreamed in the financial services industry. Despite hugely increased awareness, implementation still lacks depth across many financial institutions. The major challenge is that mainstreaming RI effectively involves a system change—a paradigm shift that, amongst other things, will require a corresponding culture change within the world of institutional investors and with it a higher degree of knowledge skills and expertise. This is no easy task: at a fundamental level, it is proving difficult to change or redirect the financial services sector. Even following the global financial crisis it would appear that, rather than change, the system has, in broad terms, merely been repaired with largely the same people doing similar things as before, albeit in a tighter and less permissive regulatory environment. Genuine global industry ESG integration and adoption of RI will require additional efforts and a greater diversity and depth of knowledge, skills, and understanding from an employee’s entering or wishing to flourish in the sector. It is in this aspect that business schools and other higher education facilities can play a leading and hugely significant role to address some of the current gaps. This chapter addresses how sustainability thinking can be embedded in finance curriculum.

Appendix

Curricula of the main non-finance professional education and training courses.

The PRI Academy

• 1. RI Fundamentals

Covers: Defining RI; recognising ESG issues, trends, and themes; and identifying the relationship between ESG analysis and investment decision-making

Includes:

Introduction to RI

• Identifying traditional analysis versus ESG analysis

• Understanding the materiality of ESG issues

ESG in Financial Analysis

• Defining environmental issues

• Understanding investment taxonomy

• Integrate environmental issues in financial modelling

Environmental Factors in RI

• Recognise social factors in financial analysis

• Understand the risk of ignoring social issues in investment decisions

Social Factors in RI

• Understand the key material impacts of corporate governance

• Recognise corporate governance factors in financial modelling

Governance Factors in RI

• Defining engagement in practice

• Recognising the different types of engagement

• Identifying the outcomes of engagement

• 2. RI Essentials

Covers: Defining RI and E, S, and G issues; recognising how ESG issues are related to sustainability trends and themes; demonstrating how ESG issues create both risks and opportunities for investors; and identifying a process for incorporating analysis of ESG issues into investment decisions

Includes:

Introduction to RI

• Understand how ESG information complements traditional financial analysis

• Identify different types of ESG information relevant to financial analysis

• Understand elements of ESG analysis

• Recognise the role of “materiality” when analysing ESG factors

• Apply techniques for qualification and quantification of ESG factors

• Integrate ESG data into basic financial models

RI and Financial Analysis

• Define key environmental issues

• Understand the relationship between business activities and ecosystem services

• Identify key environmental “megatrends”

• Identify approaches to environmental analysis at a country, sector, and company level

• Understand how to incorporate environmental issues into financial models and ratio work

RI and the Environment, RI and Society

• Identify key societal issues

• Outline the relationship between social issues, companies, and investors

• Assess the investment implications of societal issues

• Understand how to apply techniques to incorporate social issues into financial models and ratio work

RI and Corporate Governance

• Describe corporate governance

• Understand why corporate governance is important to investors

• Understand the role of people, tools, and processes that constitute corporate governance

• Recognise best practice in corporate governance

• Understand how to incorporate corporate governance issues into financial models and ratio work

Implementing an RI Programme

• Develop a plan for implementing a RI programme that meets the requirements of the PRI within your organisation

• Identify the key people, processes, and tools related to RI

• Identify the key areas and elements that could be considered when implementing RI

• Identify the information you need for internal and external reporting on your RI activities

RI and Engagement

• Design an engagement plan

• Explain how to combine engagement with other RI strategies

• Understand how to track and measure engagement activity

• Set out the typical steps taken for engaging with a company

• Understand the use of benchmarking to evaluate

• 3. Enhanced Financial Analysis

Covers: Understanding ESG information uses and identifying the role of intangible value drivers in investment decision-making

Introduction

• Define integrated analysis

• Identify the relationship between ESG data and materiality

• Understand the basic concepts needed to identify factors most material financial value

The Case Study

• Identify ESG factors in traditional sector analysis

• Outline key environmental, social, and business indicators that can impact financial value

• Identify global trends and regulations and their impact on financial analysis

• Map ESG factors in to hypothetical case studies

• Measure the extent to which ESG issues will impact key financial metrics

Step 1: Identify

• Assess the degree to which ESG factors affect industry and company performance

• Identify the guiding principles for assessing ESG issues

• Assess ESG issues using risk mapping methodologies

• Evaluate revenue, profit margins, and operations using ESG data

• Assess and rank companies according to key ESG factors

Step 2: Assess and Analyse

• Understand the guiding principles of ESG integration

• Examine a Discounted Cash Flow (DCF) model with an ESG overlay

• Identify the entry points for ESG analysis in an EP model

• Rank and score company performance

• Recognise varying options of ESG analysis and integration

Step 3: Model and Integrate

• Identify the many uses for sustainability data

• The role of ESG data in direct financial modelling

Using ESG Information

• Identify the range of ESG data available

• Understand how to use multiple forms of ESG data

• Recognise the challenges faced in collecting ESG data

• Identify global initiatives, regulations, and tools that support ESG integration

• Understand the role of reporting

Sourcing ESG Information

• Recognise and apply the key principles of ESG analysis

Sustainability Accounting Standards Board (SASB)

FSA Credential has two levels. Level I:

• sets the context for sustainability accounting, describing the current market landscape and explaining the relevant legal considerations;

• outlines how SASB standards are designed to fit within that context; and

• covers the implications of sustainability accounting for both companies and investors

Level II moves beyond the principles-based curriculum of Level I to teach a practices-based curriculum. It will help readers learn how to apply sustainability accounting to their own work for the benefit of their organisation, the capital markets, and the economy at large.

FSA Credential Level I Syllabus

Part I: The Need for Sustainability Accounting Standards

Introduction

A Growing Demand

• Changing Valuations

• Sustainability Issues Are Business Issues

• Existing, Evolving, and Emerging Regulation

• Increasing Investor Interest

Historical and Legal Basis

• The Aftermath of the Stock Market Crash of 1929

• Disclosure as the Basis of the Securities Acts

• The Securities and Exchanges Commission (SEC) and Its Work

The Role of Accounting

• Early Statements on Generally Accepted Accounting Principles

• Historical Cost Accounting and the Rise of the Accounting Principles Board (APB)

• Decision-Usefulness Enters the Lexicon

• The Founding of the Financial Accounting Standards Board (FASB)

• The FASB’s Conceptual Framework Project

Materiality: The Guiding Principle of Disclosure

• Foundational Cases: TSC v. Northway and Basic v Levinson

• The SEC’s and FASB’s Views of Materiality

• The National Resources Defence Council’s (NRDC) Rule-Making Petition

SEC Disclosure Requirements

• Periodic Filing Requirements

• Regulation S-K Requirements for Form 10-K

• MD&A Section Disclosure

• The SEC’s Climate Change Guidance

• Consequences of Inadequate Disclosure

• The Sarbanes-Oxley Act and Controls

• The SEC’s Disclosure Effectiveness Initiative

Sustainability Accounting

• Pointing the Way Forward: the American Institute of Certified Public Accountants (AICPA), the FASB, and the Chartered Financial Analysts (CFA) Institute

• Sustainability Accounting and the Accounting Profession

• External Reporting

• Internal Decision-Making

• Current Initiatives

The State of Sustainability Disclosure

• Voluntary Sustainability Reporting

• Disclosure Overload

• Securities Law, Not Semantics

• Sustainability Ratings

• Benefits of Improved Sustainability Disclosure

Part II: Understanding SASB Standards

The Importance of Standards

• Financial and Non-financial Accounting

• State of Sustainability Disclosure in SEC Filings

Introduction to SASB Standards

• US Capital Markets

• Likely to Be Material

• Decision-Useful

• Cost-Effective

• Industry-Specific

Identifying Industry-Level Disclosure Topics

• The Reasonable Investor Revisited

• Evidence-Based Research

• Stakeholder Consensus

• Evolving with the Marketplace

Components of a Standard

• Disclosure Guidance

• Disclosure Topics and Accounting Metrics

• Technical Bulletins and Interpretations

Emerging Themes Climate Change: Ubiquitous but Differentiated

• It’s Not Climate Change Alone

• Unique Sector Sustainability Profiles

Part III: Using SASB Standards

Corporate Use

• Considerations for Corporate Use

• Collecting Data

• Managing

• Reporting

Investor Use

• Overview

• Portfolio Construction

• Industry Analysis

• Company-Level Analysis

• Active Ownership

FSA Credential Level II Syllabus

Part I. Identifying the Material Financial Impacts of Sustainability Factors

• Evaluating How a Company’s Circumstances Influence Material Sustainability Factors

• The Influences of Operations (Internal Factors) on Material Sustainability Factors

• The Influences of the Operating Environment (External Factors) on Material Sustainability Factors

• Assessing Sustainability Topics

• Applying the Five Factors

• Making Use of the Findings

Part II. Evaluating the Comparability of Sustainability Information

• Normalising Data for More Effective Comparisons

• Selecting Appropriate Measures for Use in Normalisation

• Normalising to Gain Insight into Performance Over Time

• Normalising to Improve Peer Comparisons

• Analysing the Spread of Industry Performance

• Recognising Data Types

• Looking at the Distribution of Data

• Summarising the Data

• Analysing Data Dispersion

• Dealing with Outliers and Non-normal Distributions

• Considering Company-specific Context in the Analysis

• Considering a Company’s Operating Context

• Considering a Company’s Performance Context

Part III. The Connection between Sustainability Performance and Valuation

• Assessing the Timing, Duration, and Intensity of Impacts

• Key Characteristics of Impacts

• Acute and Progressive Impacts

• Risks and Opportunities

• Accounting for the Interrelatedness of Impacts

• Using Material Sustainability Data in Financial Valuation

• Interrelated Impacts and Contextual Considerations

• Channels of Impact

• Integrating Sustainability into Valuation Models