Impacts, dependencies, risks

Question 1

What is an impact

Answer 1

How business decisions or its actions positively or negatively impact environmental, social and governance issues.

Question 2

Dependencies

Answer 2

How current and future environmental social and governance issues can affect a businesses ability to create and maintain value.

Question 3

How are Risks and opportunities created

Answer 3

A businesses impacts upon relationships and resources and dependencies on relationships and resources give rise to sustainability- related risks and opportunities.

Question 4

What do different stakeholders view as more useful

Answer 4

Information on dependencies is usually seen as more useful to potential investors

Information on impacts is generally more useful to a wider group of stakeholders.

Question 5

What do businesses need to do in relation to sustainability-related impacts and dependencies

Answer 5

Identify, report and manage them.

This is because they can both affect enterprise and social value.

Question 6

Key points on impacts

Answer 6

It is often known as inside-out as it looks at companies activity affect on environment/society

Knowing about impacts is very important to a wide group of stakeholders as they are interested how the business affects their livelihood.

Whilst the focus isn’t financial, impacts can affect financial performance through:

Reduced demand from reputational damage

It may affect access to capital if investors base decisions on on environmental factors

Question 7

Hard examples of impacts

Answer 7

Waste generation-

Can mitigate by taking a circular approach and responsible disposal.

Employees- Treatment, wages, and safe working conditions.

Mitigate through investment in training, fair wages, positive/safe work environment

suppliers- choosing right suppliers and management of supply chain impacts affecting quality and sustainability of product.

Can mitigate by building a strong relationship with suppliers and ensuring they follow sustainable practices

Customers- the way they are treated impacted revenue, preferences of customers and reputation.

Provide good customer service and respond to demands.

Question 8

Key points about dependencies

Answer 8

Often known as outside in approach as relates to how external factors such as environmental and social factors affect business operations.

This perspective focuses on risk and opportunities that arise from the external environment in which a business operates.

Knowing about dependencies is more useful to investors who want to

Understand exposure to sustainability risks

Maximise opportunities as part of their assessment of the value and to inform them of investment decisions/opportunities

Question 9

3 types of dependencies

Answer 9

Natural resources
(rely on resources that can be impacted by weather events, rising sea level and ecosystem disruption)

Human capital (business depends on skill and health of workforce to operate)

social infrastructure (including stable government, education, healthcare and transportation.

Social infrastructure helps ensure a reliable supply of raw materials through transport.

Stable demand from government and education.

Suitable workforce- education

Question 10

How can we manage dependencies

Answer 10

Natural resources- sustainable consumption and management of resources ensuring long term availability.

Human capital- Provide positive safe working conditions and training.

Social infrastructure- contribute to social infrastructure that supports economic growth and stability.

Question 11

Interconnected impacts and dependencies

Answer 11

An organisation can sometimes both impact and depend on the same resource or activity.

For example, an agricultural business depends on water supply for its production process (dependency) but its operations can lead to water pollution/ depletion (impact)

Question 12

Sustainability related risk

Answer 12

Potential adverse affects that sustainability factors can have on business operations, financial performance and reputation.

Question 13

Sustainability related opportunities def

Answer 13

Potential positive affects that sustainability factors can have on business operations, financial performance and reputation.

Question 14

Classification of
sustainability related risks

Answer 14

They can be climate related risks or other sources of risk.

Question 15

Climate risks

Answer 15

They can be either

physical risks resulting from effects of climate change.

Acute physical risks (event driven) they arise from a specific weather related event e.g a storm or drought causing major disruption to business operations.

Chronic physical risk (from longer term shifts in climatic patterns) such as sea level rise, changes in temp and precipitation, reduced water availability.

Transition risks (Arise from efforts to transition to a lower carbon economy) e.g

Policy risks
Legal risks
Technological risks
Market risks
Reputational risks

Question 16

Financial implications of climate risk

Answer 16

Physical risk-

Increased operational costs

cost from damage to assets

indirect cost from supply chain disruption.

Transition risks-

Increased operating cost

Asset impairment (value falls below amount in financial statements) due to changes in climate regulation.

Financial performance from shift in consumer demand

Stranded assets- no longer create economic benefit

Question 17

other sustainability related risk examples

Answer 17

Supply chain disruption affecting operations-
This can be caused by climate-related issues, lack of skilled workforce etc

Energy availability and cost

Insurance related issues

Social risks- inequality and tension between groups may harm reputation.

Question 18

Examples of climate related opportunities

Answer 18

Energy efficiency- Implement energy efficient tech
reducing emissions and costs.

Waste reduction- Less waste reduces emissions and is more efficient. Avoids any harmful effects on ecosystems.

Build infrastructure/resilience- enhance infrastructure.
This reduces maintenance cost from damage etc.
It also makes planning for the future easier.

Question 19

Other sources of opportunities

Answer 19

Tech innovation

Workforce- Investing in health and safety measures, fair pay and continuous development to attract skilled workforce and increase motivation.

Market gaps- Identify gaps in the market to obtain revenues and market share.

Regulatory changes- Reg change can open new markets and allow innovation

Social trends- changes in consumer behaviour/ preferences leading to new business opportunities.

Question 20

Enterprise value def

How does sustainability risks and opportunities influence this

Answer 20

Refers to expectations of the amount, timing and certainty of future cash flows over the short, medium and long term.

Investors use enterprise value to assess business worth.

Risks and opportunities influence this by impacting financial performance, reputation and long-term viability

Question 21

What do investors use to evaluate a business cashflow

Answer 21

Amount-
Timing- When the cash flows will be generated

Certainty- predictability of cashflows

Investors can then determine the potential returns and risks associated with investing.

Question 22

Social capital definition

Answer 22

This refers to the positive impact a business has on society such as employee and community well-being.

By creating a strong social value, a business can enhance its reputation, increase customer loyalty and build a positive work environment.

This will all contribute to sustainable growth.

Question 23

Examples of sustainability related risks that may damage social value

Answer 23

Poor governance- leading to labour issues and inadequate management of environmental impacts leading to reputation loss.

Resource depletion- leading to increased competition for resources and potential social unrest which has a negative impact on society.