Business, Technology and Finance CFAB - Workbook 2024 - ICAEW

BUSINESS, TECHNOLOGY A N D FINANCE

W O R K B O O K 2 0 2 4 CERTIFICATE LEVEL

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I C A E W

I C A E W

The Institute of Chartered Accountants in England and Wales

Business, Technology and

Finance

WORKBOOK

For exams in 2024

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Business, Technology and Finance

The Institute of Chartered Accountants in England and Wales

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© ICAEW 2023

Welcome to ICAEW

Business, Technology and Finance

Key resources

Professional skills required by the ACA qualification

Sustainability in the ACA Qualification

1 Introduction to business

2 Managing a business

3 Organisational and business structures

4 Introduction to business strategy

5 Introduction to risk management

6 The finance function and financial information

I Business finance

8 The accountancy profession

9 Governance and ethics

1 0 Corporate governance

I I The economic environment of business and finance

12 External regulation of business

Welcome to ICAEW

I'd like to personally welcome you to ICAEW

As we continue the global recovery from COVID-19 and navigate geopolitical a n d economic crises, the role of the

accountancy profession has never been more important

As an ICAEW Chartered Accountant, you will make decisions that will define the future of global business in a

fast-changing and volatile world

Whether studying f o r o u r internationally recognised Certificate in Finance, Accounting and Business (ICAEW CFAB) o r ourworld-leading chartered accountancy qualification, the ACA, you will acquire exceptional knowledge and skills - with

technology, sustainability and ethics at the heart of your learning A focus o n capabilities such as judgement and

scepticism will enable you to make the right decisions in diverse and often complex environments

You will be equipped to flourish and to lead in areas that are transforming the business landscape This includes

embracing technological change a n d harnessing digital disruption, to help our profession deliver greater value It alsoincludes putting climate change and sustainability at t h e heart of business strategy We will equip you to be adaptable andagile in your work and all within a set of values fundamental to trust a n d transparency, which will set you apart from others.Joining over 202,000 ICAEW Chartered Accountantsand students worldwide, you are n o w part of a global community.This unique network of talented and diverse professionals work in the public interest to build economies that are

sustainable, accountable and fair

You are also joining a community of 1.8m chartered accountantsand students as part of Chartered Accountants

Worldwide - a family of leading institutes, of which we are a founder member

We will support you through your studies and throughout your career: this is the start of a lifetime relationship, and we will

be with you every step of the way to ensure you are ready to face the challenges of the global economy Visit t h e Keyresources section to review the resources available as you study

With our training, guidance and support, you will join our members in realising your career ambitions, developing leading insights a n d maintaining a competitive e d g e

world-We will enable a world of sustainable economies, together

I wish you the best of luck with your studies

Michael Izza

Chief Executive

ICAEW

Business, Technology and Finance

You can access this guide and more exam resources o n o u r website If you are studying this exam as part of the ACAqualification g o to icaew.com/examresources o r if you are studying the ICAEW CFAB qualification g o to

icaew.com/cfabstudents

Module aim

To provide you with an understanding of how businesses operate and how finance functions help businesses to achievetheir objectives

O n completion of this module, you will be able to:

• identify t h e general objectives of businesses a n d the functions and tasks that businesses perform in order to meet theirobjectives;

• specify the nature, characteristics, advantages and disadvantages of different forms of business and organisationalstructure;

• identify t h e purpose of financial information produced by finance functions, specify how finance functions supportbusiness operations, including the measurement of risk, and identify sources a n d methods of financing f o r businesses;

• specify the importance a n d attributes of the accountancy profession and the role that governance plays in the

management of a business, including h o w a business can promote corporate governance, sustainability, ESG,

corporate responsibility and an ethical culture;

■ specify the impact on a business of the external environment in which it operates; and

■ specify key issues in relation to data and its collection, visualisation and analysis, and identify key features, benefits andrisks of different tech nologies

Method of assessment

The Business, Technology a n d Finance exam is 1 5 hours long The exam consists of 50 questions worth two marks each,covering the areas of the syllabus in accordance with the weightings set o u t in the specification grid The questions arepresented in t h e form of multiple choice, o r multiple response

Ethics and professional scepticism

Ethical thinking will b e required across all areas of the syllabus A specific weighting is given in the syllabus area 'Keyissues for the accountancy profession and business' which includes ethics and business ethics, in the table below Thepolicies and procedures necessary to promote an ethical culture will be emphasised Students will b e expected to applyprofessional scepticism Additionally, under the syllabus area 'The external environment of business', students mustdemonstrate an awareness of the needs of different stakeholders, and in the 'Technology and data analysis' area theymust be able to identify types of data bias, their causes and effects

Specification grid

This g r i d shows the relative weightings of subjects within this module and should guide the relative study time spent o neach O v e r t i m e the marks available in the assessment will equate to the weightings below, while slight variations mayoccur in individual assessments to enable suitably rigorous questions to be set

Weighting (%)

Key resources

Whether you're studying the ICAEWCFAB or ACA qualification with an employer, at university, independently, or as part

of a n apprenticeship, we provide a wide range of resources and services to help you in your studies

ACA students, you can access dedicated exam resources, guidance and information for the ACA qualification via yourdashboard at icaew.com/dashboard

ICAEW CFAB students, you can also access dedicated exam resources, guidance and information at

i ca e w co m/cfa b stu d e n ts

Syllabus and technical knowledge grids

The syllabus presents the learning outcomes for each exam and should be read in conjunction with the relevant technicalknowledge grids

Student support team

O u r student support team is here to help a n d advise you, so d o not hesitate to get in touch Email

studentsupport@icaew.com o r cal I +44 (0)1908 248 250 If you are browsing our website, look out for t h e live help boxes.You will be able to speak directly to an adviser Mia, ourChatBot, is also o n hand to answer your queries

Student Insights

Access our practical a n d topical student content o n our dedicated online student hub, Student Insights at

icaew.com/studentinsights You'll find interviews, guides and features giving you fresh insights, innovative ideas a n d aninside look at the lives and careers of our ICAEW students and members N o matter what stage you're at in your journeywith us, you'll find content to suit you

ICAEW Business and Finance Professional (BFP)

ICAEW Business and Finance Professional (BFP) is an internationally recognised designation and professional status Itdemonstrates your business knowledge, your commitment to professionalism and that you meet the standards of amembership organisation Once you have completed t h e ICAEW CFAB qualification o r the AC A Certificate Level, you areeligible to apply towards gaining BFP status Start your application at icaew.com/becomeabfp

Professional skills required by the ACA qualification

The following professional skills areas are present throughout the ACA qualification

Skill area Overall objective

Assimilating and using

Applying judgement Apply professional scepticism and critical thinking to identify faults, gaps,

inconsistencies and interactions from a range of relevant information sources a n drelate issues to a business environment

Concluding, recommending

and communicating

Apply technical knowledge, skillsand experience to support reasoning andconclusion and formulate opinions, advice, plans, solutions, options and reservationsbased o n valid evidence and communicate clearly i n a manner suitable for therecipient

The level of skill required to pass each exam increases as ACA trainees progress upwards through each Level of the ACA

qualification The skills progression e m b e d d e d throughout the ACA qualification ensures ACA trainees develop theknowledge and professional skills necessary to successfully operate in the modern workplace and which are expected bytoday's forwa rd-th i nki n g e m ployers

At Certificate Level, t h e ACA professional skills which you are expected to demonstrate in the exam are summarised asfollows:

Assimilating and using information

• Understanding the situation and t h e requirements

• Identifying and using relevant information

■ Identifying and prioritising key issues

Structuring problems and solutions

■ Structuring data

• Developing solutions

Applying judgement

“ Applying professional scepticism a n d critical thinking

• Relating issues to the broader business environment, including ethical issues

Concluding, recommending and communicating

• Concluding and recommending

■ Communicating

To help you develop your ability to demonstrate competency in each professional skills area, each chapter of this

Workbook includes u p to four professional skills guidance points

Each professional skills g u i d a n c e p o i n t focuses o n o n e of t h e f o u r ACA professional skills areas a n d e x p l a i n s h o w t o

demonstrate a p a r t i c u l a r aspect of t h a t p r o f e s s i o n a l skill relevant to t h e topic b e i n g s t u d i e d It is a d v i s e d y o u refer b a c k to

t h e p r o f e s s i o n a l skills g u i d a n c e p o i n t s w h i l e revisiting specific t o p i c s and d u r i n g g u e s t i o n p r a c t i c e

Sustainability in the ACA Qualification

T h e sustainability l a n d s c a p e has d e v e l o p e d a t a r a p i d pace i n recent years, w i t h a m a r k e d shift from v o l u n t a r y frameworks

a n d g u i d a n c e to m o r e mandatory r e p o r t i n g a n d risk m a n a g e m e n t r e q u i r e m e n t s

The relevance of sustainability to the r o l e of a c c o u n t a n t s is g r o w i n g , with t h e skillset p r o v i d e d by t h e CA b e c o m i n gincreasingly v a l u a b l e to r e s p o n d to the t i d e of i n c o m i n g r e g u l a t i o n s a n d increasing i n v e s t o r a n d b r o a d e r s t a k e h o l d e r

r e q u i r e m e n t s

The t a x o n o m y a n d l a n g u a g e a r o u n d sustainability a n d its related areas is v a r i e d a n d may as yet b e u n f a m i l i a r a n d so

t h e r e is a need for consistency of sustainability l a n g u a g e a n d u n d e r l y i n g c o n c e p t s ICAEW has created this g l o s s a r y to

p r o v i d e s u p p o r t for g r e a t e r consistency a n d c o n c e p t s across t h e ACA exams

Term Definition o r description

Climate

scenario

analysis

E n v i r o n m e n t a l issues s u c h as climate c h a n g e are g i v i n g rise to s i g n i f i c a n t risks f o r businesses These

m a y arise from physical climate events o r t h e t r a n s i t i o n to a net-zero c a r b o n e c o n o m y S c e n a r i oanalysis is key to better u n d e r s t a n d i n g a n d m a n a g i n g future risks t o d a y as w e l l as s u p p o r t i n g t h e

I n the UK, t h e C o m p a n i e s Act 2 0 0 6 (Strategic R e p o r t a n d Directors' R e p o r t } r e q u i r e s quoted

c o m p a n i e s to report o n e n v i r o n m e n t a l matters within t h e Strategic R e p o r t section of t h e i r A n n u a lReport, to t h e extent t h a t t h i s e n v i r o n m e n t a l i n f o r m a t i o n is necessary for a n u n d e r s t a n d i n g of t h e

d e v e l o p m e n t , p e r f o r m a n c e o r p o s i t i o n of t h e c o m p a n y ' s business

This r e q u i r e m e n t c o m e s u n d e r o n e of t h e s e v e n g e n e r a l duties directors h a v e to t h e c o m p a n y

c o m m o n l y referred to as t h e ' s 1 7 2 d u t y ' to ' p r o m o t e t h e success of t h e c o m p a n y ' Part 1 of t h a t dutynotes that:

' [ ] A d i r e c t o r of a c o m p a n y m u s t act i n the w a y h e considers, i n g o o d faith, w o u l d be most likely topromote t h e success of t h e c o m p a n y for t h e benefit of its m e m b e r s as a w h o l e , a n d i n d o i n g so have( a m o n g s t other matters) regard to [ J the i m p a c t of t h e c o m p a n y ' s operations o n the c o m m u n i t y

a n d t h e e n v i r o n m e n t '(Source: https://www.icaew.com/technical/financial-reporting/section-1 72-1 - s t a t e m e n t )

Corporate

Social

Responsibility

Corporate Social Responsibility (CSR) is a m a n a g e m e n t c o n c e p t w h e r e b y c o m p a n i e s i n t e g r a t e social

a n d e n v i r o n m e n t a l concerns i n t h e i r business operations a n d interactions with their stakeholders.CSR i s g e n e r a l l y understood as b e i n g the w a y t h r o u g h w h i c h a c o m p a n y achieves a b a l a n c e of

e c o n o m i c , e n v i r o n m e n t a l a n d social i m p e r a t i v e s ( ' T r i p l e - B o t t o m - L i n e - A p p r o a c h ' ) , w h i l e at the s a m etime a d d r e s s i n g t h e expectations of s h a r e h o l d e r s a n d stakeholders

D o u b l e

materiality

D o u b l e materiality m e a n s c o n s i d e r i n g n o t o n l y t h e sustainability issues t h a t m i g h t create financialrisks for t h e c o m p a n y (financial materiality), b u t a l s o t h o s e sustainability issues w h e r e a c o m p a n y ' sactivities m a t e r i a l l y i m p a c t o n p e o p l e a n d the e n v i r o n m e n t ( i m p a c t materiality)

This concept is f u n d a m e n t a l to t h e CSRD

Environmental, social and governance (ESG) approaches sustainability-related issues through acorporate lens a n d considers t h e impact of these risks o n business and enterprise values (rather than

o n society more broadly) It is a frequently used terminology in corporate and investmentcommunities,

A t a high level, it is another characterisation of sustainability, providing the 3 lenses of environment,social and corporate governance to use when exploring relevant sustainability factors::

Social

Climatechange Human Diversity &

Environmental

Waste

Air quality

When looked at in more detail, however, ESG is distinct from sustainability It does not include

consideration of planetary limits and a social foundation, together considered the 'safe operatingspace' within which companies, governments a n d individuals can sustainably operate

According to the Principles for Responsible Investment (PRI) (a United Nations-supportedinternational network of investors) ESG issues faced by organisations can b e defined as follows:

• Environmental: Issues relating to t h e quality and functioning of the natural environment and

natural systems These include: biodiversity loss; greenhouse gas (GHG) emissions; climatechange; renewable energy; energy efficiency; air, water o r resource depletion or pollution; wastemanagement; stratospheric ozone depletion; changes in land use; ocean acidification; andchanges to the nitrogen and phosphorus cycles

• Social: Issues relating to the rights, well-being and interests of p e o p l e and communities Theseinclude: human rights; labour standards in the supply chain; child, slave and bonded labour;workplace health and safety; freedom of association a n d freedom of expression; human capitalmanagement and employee relations; diversity; relations with local communities; activities inconflict zones; health and access to medicine; HHWAIDS; consumer protection; and controversialwea pons

• Governance: Issues relating to the governance of companies and other investee entities In t h e

listed equity context these include: b o a r d structure, size, diversity, skills a n d independence,executive pay, shareholder rights, stakeholder interaction, disclosure of information, businessethics, bribery and corruption, internal controls and risk management, and, in general, issuesdealing with t h e relationship between a company's management, its board, its shareholders andits other stakeholders This category may also include matters of business strategy, encompassingboth the implications of business strategy for environ mental and social issues, and how the

strategy is to b e implemented

(Source:

https ://www u n pri.org /Uploads/i/m/n/ma i ndefi n itionstoprireporti ngfra mework_1 27272_949397 p d f )

Sustainability describes a world of thriving economies and just societies based o n what nature canafford It incorporates consideration of b o t h the impacts and dependencies of a n organisation and

so includes those factors that are material both to the organisation b u t also to society

Environmental, social and governance (ESG) approaches this issue through a corporate lens andconsiders only how these risks and opportunities affect a business and its enterprise value

Whilst sustainability includes the concept of environmental and social limits (planetary limits and asocial foundation) within which there is a safe operating space, ESG focusses o n enterprise value and

so does not incorporate considerations of a safe operating space

Scope 1, 2 a n d 3 is a way of categorising different kinds of Greenhouse Gas (GHG) emissions

• Scope 1: The GHG emissions that an entity makes directly by eg, running boilers a n d vehicles.

• Scope 2: The GHG emissions it makes indirectly by eg, purchasing electricity or energy that is

produced o n its behalf

• Scope 3: All the GHG emissions the entity is indirectly responsible for, up and d o w n its value chain

eg, b y buying products from its suppliers, and from its products when customers use them

Uprtr ram KtMfal companr Downi t/rem at i

(Source: GHG Protocol Corporate Standard)

Impacts and

dependencies

There are two fundamental aspects to sustainability:

• o n e is organisations considering how their business positively or negatively affects environmental,societal a n d governance issues ('impacts');

worker rights Human rights Health t saf etv Waste GHG emissions Water usage Land ijm? &

company to inform investment decisions This relates to financial materiality In this context, useful information c o m prises financially material disclosure topics & performance metrics addressingsustainability dependencies (and impacts) relevant to enterprise value

investor-Impact information is generally useful for broader stakeholders, including consumers, civil societyand employees The decisions they make are more attuned to information on how an organisation isimpacting, for example, livelihoods; deforestation; equality and health In this context informationuseful f o r broader stakeholders includes disclosures, indicators and contextual information

addressing sustainable development, impacts, o r public policy objectives

Reporting impact information alongside dependencies is aligned with t h e concept of d o u b l emateriality However, a company's impacts can also be financially material d u e to reputationalimpacts affecting consumer demand, license to operate etc

These concepts are usefully visualised by the International Federation of Accountants here:

https :// ww w i fa c o rg /sy ste m/fi I e s/ p u b I i cati o ns/fi I es/ 1 FACe nhancingco rporate re po rti ng sustaina bility-build i ng-blocks pdf

-ENHANCING CORPORATE REPORTING

SUSTAINABILITY BUILDING BLOCKS: ENCOURAGING CONSISTENT, COMPARABLE AND ASSURABLE SUSTAINABILITY INFORMATION

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fcxkdn prdoim rxr Ejrgrfi jr<d FVtTfl +w rwrtf * trti*nabni> <*<w Wh OCW ndutiy te 4, to ftfJ tut

Climate change adaptation refers to adjustments of strategies and actions in response to the effects

and future risks of climate change These risks may be linked to the physical impacts of climate change; but also, the economic impact of a transition towards net zero Identifying, managing and adapting to these risks is key for the development of a resilient business that can survive, and even thrive in the unprecedented physical and transitional changes ahead.

Paris Agreement

and Net Zero

The Paris Agreement is an international treaty on climate change that was signed by nearly 200 countries in 2015 at the United Nations Framework Convention on Climate Change's 21st Conference of Parties, known as COP21.This agreement is generally regarded as the framework for international action towards mitigating climate change and its impacts The Paris Agreement set the ambition to a maximum of 2’C global temperature change, with the preferred goal of 1 ,5°C above pre-industrial levels.

The term 'net zero' refers to the global reduction of greenhouse gas emissions to net zero by 2050 and is the action required to limit temperature rise to 1.5 degrees Celsius.

Physical and

Transition Risks

The risks business and the public sector will face due to climate change can be categorised into two areas:

(a} Physical risks, which arise from the physical effects of climate change such as storms, extreme

temperatures, wildfires, flooding.

(b) Transition risks, which relate to social and economic shifts to a low-carbon economy such as

changes to policy, regulation, technology and market.

Stranded assets 'Stranded assets' are assets that are economically stranded, having suffered from 'unanticipated or

premature write-downs, devaluations or conversion to liabilities' (Smith School of Enterprise and the Environment, 2014}.

Stranded assets can be caused by a range of environmental-related risks including:

• climate change

• new regulations

• evolving social norms

• litigation

Sustainability Sustainability is a broad term that encompasses an environmental and social focus to improve

people's lives and improve the planet for the long-term The technical definition of sustainability comes from the 1 987 Brundtland report, and is defined as development that 'meets the needs of the present without compromising the ability of future generations to meet their own needs'.

Frameworks, goals or categories for sustainability can help to break it down for practical application This is where characterisations such as environmental, social and governance (ESG) or

environmental, social and economic factors can be useful.

Sustainability is not limited to the environment Interpretations of the scope of sustainable development have developed from a narrow interpretation which focused on 'green issues' to broader interpretations which include concerns such as:

• Increasing extremes of poverty and wealth

The UK Government is the first in the G20 to mandate that the largest UK-registered companies provide disclosures, on a 'comply or explain' basis, in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The TCFD structure their recommendations around four core elements - Governance, Strategy, Risk Management, and Metrics and Targets Each of these core elements include reporting requirements and additional guidance for disclosing organisations.

In particular, the TCFD focus on forward-looking financial disclosure They ask organisations to identify climate- related risks and opportunities, to consider the financial implications, and to assess the resilience of the business strategy to future climate outcomes.

TCFD recommends organisations use scenarios to explore future business risks arising from climate change and present the findings in the narrative report.

WEF Global

Risks Report

The World Economic Forum's annual Global Risks Report explores some of the most severe risks the world may face over the next decade It is underpinned by their annual Global Risks Perception Survey, bringing together leading insights from over 1,200 experts across the World Economic Forum's diverse network.

In 2023, perceptions of the most severe risks on a global scale over the next 2 and 10 years were as follows:

2 years 10 years

1 Cost or frvng cnss 1 FaAjrtt te rmltgaiu CtaTkllO ChilhgO

2 NJural dsasm and nxtrHne weather events

2 Fafluro □( drnalB-change adaptation

3 3 Natural disasters and e*1re™ weather

«srn$

4 FaAirtf to irrigate driiatto change 4 loss and ecosysiorri coflapaj

5 Hosion Of scoad c ohesion and see ietal pctwatcxi

5 rrvcAxMary rr>gralKxi

fl efwonrnor-ia) darnage nodents

6 Natural raw<jce cnees

7 onaio change adaptation 7 Enraon of scoai cottes* srxjot J

fl Wdespraad CytrtrCrirne and cyber rsecunty B Widespread cytwitnme and Cyber insecurity

9 Natural resourw crises 9

10 Large-state nvokrrtary rragratjon 10 Large -scJe envnxvnentaf damage

ask categories | Econonx? | b><w»yitai |GeopoUicaJ | Social | Technological

(Source: https://www3.weforum.org/docs/WEF_Global_Risks_Report_2023.pdf)

The World Economic Forum (WEF) International Business Council (IBC) metrics provide a usefulstarting point when considering what sustainability metrics may be relevant for an organisation TheWEF paper 'Measuring Stakeholder Capitalism' was written with the aim of developing a core set of

c o m m o n metrics and disclosures o n non-financial factors, for sustainable value creation It highlightsthe key themes significant to the planet, society and business and was produced in collaborationwith Deloitte, EY, KPMG and PwC in 2020

The metrics are categorised into four pillars: Principles of Governance, Planet, People and Prosperityand aligned with their relevant SDGs

WEF IBC

metrics

Sustainability and t h e role of ACA Professionals

ICAEW Chartered Accountants ('ACA Professionals') recognise that sustainability is at the core of what they d o and are

capable of actively using their business skills to analyse h o w to make the new sustainable economy work for their

business

The relevance of sustainability to the role of accountants is growing, with t h e skillset provided by t h e ACA becoming

increasingly valuable to respond to incoming regulations and increasing investor and broader stakeholder requirements.Finance and accounting professionals need to move beyond simply measuring and reporting the impact of climate

change, environmental regulation, supply chain pressure and rising energy costs

ACA Professionals need to focus o n understanding those implications and integrating them into financial managementand business planning by integrating knowledge and understanding the broader implications of environmental, socialand governance issues

Sustainability and decision making

Integrating sustainability to strategic decision making and operational processes is closely related to the skills and

experience of ACA Professionals Examples include:

• Identification and management of risks

• Compliance with laws, regulations and code of corporate governance

• Design and operation of management control systems

• Measurement of environmental, social and governance (ESG) related liabilities and impaired assets, financial

instruments and new forms of taxation, such as renewable energy reliefs o r carbon emission tariffs and any assurancerequired thereon

Where the technical issues extend beyond the accountant's reach then the accountant will work with sustainability expertsother relevant experts when required, which is g o o d practice

• Advising on organisation's specific sustainability metrics to monitor and report.

• Developing methods and solutions to measure sustainability metrics.

• Developing processes and controls to produce and verify the information.

■ Preparing sustainability reports and advising on the sufficiency of current sustainability reporting disclosures.

• Providing assurance over mandatory and voluntary sustainability reported information.

• Providing sustainability information that is relevant to strategic and operational decision making.

• Influencing others in positions of power to take appropriate action to safeguard or improve an organisation's

sustainability performance.

Applying sustainability related learning in ACA

ACA students can develop these skills by applying a common set of sustainability principles across every ACA module in

this complex and fast changing area.

These core principles include, but are not limited to:

• Consider an organisation's sustainability-related dependencies alongside its sustainability-related impacts.

• Clarify that climate change is only one aspect of environmental concerns.

■ Consider sustainability-related opportunities alongside risk.

• Consider physical risks as well as transition risks and opportunities.

• Confirm that climate and other environmental issues are considered against the broader context of sustainability.

• Apply a principles-based approach of identifying, evaluating and mitigating sustainability-related risks and

opportunities where the sustainability landscape is complex and lacks a global/mandatory standard.

This can be aided by the application of the following ACA Professional Skills to specific sustainability-related situations:

■ Assimilating and using information

• Structuring problems and solutions

• Applying judgement

• Concluding, recommending and communicating

3 Stakeholders in the business

4 What are the business's objectives?

5 Mission, goals, plans and standards

6 Sustain ability

Summary

Further question practice

Technical references

Self -test questions

Answers to Interactive questions

Answers to Self-test questions

Learning outcomes

• State t h e general objectives of businesses

■ State the general objectives of strategic management and specify the strategic management process and

interrelationship between a business's vision, mission and strategic objectives

* Specify t h e nature of ethics, business ethics, sustainability, ESG and corporate responsibility

The specific syllabus references for this chapter are: 1a r 1 b, 4h

While the material in this chapter is essentially introductory, questions o n business objectives will be directly assessed

Questions are likely to b e set in multiple choice format, either as a straight test of knowledge o r in a scenario.

Chapter study guidance

Use this schedule and your study timetable to plan the dates o n which you will complete your study of this chapter.

Topic Practical significance Study approach Exam approach Interactive Questions

1 What is an organisation?

You will come across many

different types of

organisation, both in your

career and in your exams

This section introduces the

concept of an organisation

and discusses the ways in

which organisations differ

Think about how thefactors in 1 4 apply tothat organisation

While t h e material in thischapter is essentiallyintroductory, questions o nbusiness objectives will bedirectly examined

Questions are likely to beset either as a straight test

of knowledge o r in ascenario

Stop and think

Thin k of a n example of anot-for-profit

organisation What is itsprimary objective?

Questions will focus o n themeaning of business and

the terms primary and

secondary objectives

3 Stakeholders in the

business

Organisations need to know

who their significant

stakeholders are so they can

try to meet their objectives.

Approach

Learn what stakeholders are and the distinction between primary and secondary stakeholders.

Stop and think

Does a business need to only consider the needs

of its shareholders, and can it ignore other stakeholders?

Questions could require you to identify the stakeholders of a particular organisation.

IQ1: Corporate responsibility

This is a good example about how a group of

stakeholders' expectations might

influence the objectives of an

that management know

what they have to focus on.

Approach

Read through this section and be aware of different objectives that organisations may have.

Note the word 'satisficing' and ensure you know what this means.

Stop and think

Do you think that the secondary objectives of

a business may conflict with the primary

objective?

Questions will focus on why businesses may follow objectives other than maximising profit or wealth, so remember why this might occur.

standards

Organisations need to know

what their objectives are so

that they can ensure that

plans and work performed

meet these objectives.

Without knowing the

objectives there is a risk that

organisations may become

directionless.

Approach

Note the meaning of mission, vision, and goals Be aware of their role in planning and controlling an organisation.

Stop and think

Think of an organisation you know well Do you know what its mission and vision is?

What goals might it have?

Exam questions in this area will usually test your

knowledge of the differences between the different types of

objectives They also focus

on the meaning of SMART.

IQ2: Goals

Tests your understanding of the importance of non- operational goals.

6 Sustainability

Businesses cannot ignorethe wider impact that theyhave o n society and o n t h eplanet, or t h e fact that they

d e p e n d o n them to b e able

to create and maintain value

in the future This sectionlooks at why these arerelevant to a business

Approach

Make sure you know themeaning of

sustainability a n d thethree different types ofsustainability Ensureyou know the meaning

of People, Profits andPlanet Make sure youunderstand the

importance of climatechange and the impact

is has o n business aswell as the impact thatbusinesses can have onclimate change

Stop and think

What actions does youremployer o r educational

institution take in respect of climate

change? Do they have a

published policy about

their approach? Find out

and read it.

Questions are likely to testyour understanding of whybusinesses cannot ignore

sustainability and climate

change They may also testyour understanding of the

role of the accountant in

dealing with these issues

IQ3: Great Sportswear Limited

Helps to test yourunderstanding of theimportance of

businesses behaving

in a sociallyacceptable way even

if that appears toconflict withmaximising profits i nthe short run

Once you have worked through this guidance you are ready to attempt the further question practice included at the end

of this chapter

1 What is an organisation?

Section overview

• There are many different types of organisation i n both the not-for-profit and business sectors

* Organisations exist because the collective efforts of people are more productive as a result of them

* All organisations sha re the featu re that they are designed to get things done.

• Organisations differ i n terms of ownership, control, activity, profit orientation, size, legal status and technology.

1.1 Introduction to organisations

Here are some examples of organisations, categorised as to whether they are profit- oriented (private sector) or profit (charity/ p u b lie sector)

not-for-Profit-oriented Not-for-profit

A professional education provider A local authority

1 2 Why do orga nisations exist?

Organisations exist because they::

• let people specialise in what they d o best;

• save time, because p e o p l e can work together o r d o two aspects of a different task at the same time;

■ accumulate and share knowledge (eg, about how best to build cars);

• let p e o p l e pool their expertise; and

• enable synergy - the combined output of two or more individuals working together exceeds their individual output('None of us is as smart as all of us')

In brief, organisations enable people to b e more productive.

1.3 What d o organisations have in common?

The definition below states broadly what all organisations have in common

Definition

Organisation: A social arrangement for the controlled performance of collective goals, which has a boundary separating

it from its environment

The following table shows how this definition applies to two examples of organisations: a car manufacturer and an army

Characteristic Car manufacturer

(eg Ford)

Army

Social arrangement: individuals

gathered together for a purpose

People work i n different divisions,making different cars

Soldiers are in different regiments,and there is a chain of command fromthe top to the bottom

Controlled performance: performance

is monitored against the goals and

adjusted if necessary to ensure the

goals are accomplished

Costs a n d quality are reviewed andcontrolled Standards are constantlyimproved

Strict disciplinary procedures, training

Collective goals: the organisation has

goals over and above t h e goals of t h e

people within it

Sell cars, make money Defend t h e country, defeat the enemy,

international peace keeping

Boundary: the organisation is distinct

from its environment

Physical: factory gatesSocial: employment status

Physical: barracksSocial: different rules than for civilians

1.4 How do organisations differ?

Organisations also differ in many ways Here are some possible differences:

Ownership (public vs private) Private sector: owned by private investors/sha reholders

Public sector: owned b y the nation and managed by the government

Control By the owners themselves, by people working o n their behalf, or indirectly by

government-sponsored regulators

Activity (ie, what they d o ) Manufacturing, healthcare, services (and so on)

Profit or non-profit orientation Businesses exist to make a profit An army o r a charity, o n the other hand, are

not profit-oriented

Legal status Company, or an unincorporated body such as a club, association, partnership

o r sole trader

Sources of finance Borrowing, government funding, share issues

Technology High use of technology (eg, banks) vs low use (eg, corner shop)

1 4.1 Differences in what organisations d o

Organisations have many different types of activity, depending o n the industry they are engaged in

Agriculture Producing and processing food

Manufacturing Acquiring raw materials and, b y t h e application of labour a n d technology,

turning t h e m into a product (eg, a car)

Extractive/raw materials Extracting and refining raw materials (eg, mining)

Energy Converting one resource (eg, coal) into another (eg, electricity)

Retai ling/distribution Delivering goods to the e n d consumer

Intellectual production Producing intellectual property (eg, software, publishing, films, music)

Technology Digitalising products (eg, e-books) and processes (eg, selling insurance

online)

Service industries Providing intangible services such as banking, accountancy and advertising,

including public services such as education and healthcare

2 What is a business?

Section overview

■ Organisations have secondary objectives that support their primary objectives

• Fora profit-making organisation, the primary objective is to maximise the wealth of its owners; f o r a non-profit

organisation it is to provide goods and services for its beneficiaries

* A business is an organisation which aims to maximise its owners' wealth b u t which can be regarded as an entity

separate from its owners

Definition

Business: An organisation (however small) that is oriented towards making a profit for its owners so as to maximise their

wealth a n d that can b e regarded as an entity separate from its owners

It is the primary objective of the organisation that determines whether or n o t it is a business Although 'business' is a loose

term which has no legal definition as such

2.1 Profit vs non-profit orientation

Businesses aim to make profits (they have a profit orientation) while for non-businesses there is a different primary focus o robjective The basic difference in orientation between the two different types of organisation is expressed i n the figure

below Note the distinction between primary and secondary objectives A primary objective is the most important: the

other objectives support it We shall come back to this

Profit-oriented organisation

Not-for-profit organisation

O w n e r s Public b e n e f i c i a r i e s

Maximise profit/

dividend /wealth

Provision of goods/services

Profit Output ( good s/serv ices)

Output of

goods/services

Revenue from good s/serv ices

Minimise cost of primary goal

I n p u t s (materials, labour, finance)

I n p u t s (materials,,

l a b o u r , finance) Costs

Revenue (taxation)

Primary

Secondary

objective

Figure 1 1 : Profit and not-for-profit organisations

Profit- oriented organisations are generally referred to as 'businesses', though this is in f a c t a rather loose term

• Businesses are profit- oriented, b u t they encompass a variety of legal structures (as we shall see i n the chapter,

Organisational a n d business structures)

- Companies are owned by shareholders

- A sole tradership is owned by one individual (usually called the proprietor)

- Partnerships are owned collectively by the partners

• Not-for-profit organisations are frequently structured and run like a business, so that they benefit from the economy,efficiency a n d effectiveness in using resources that profit orientation brings, but they are not generally owned b y

shareholders, proprietors or partners They d o not primarily aim to maximise profit or the wealth of their owners, b u tinstead are focused o n providing g o o d s and services to their beneficiaries at minimised cost

• The type of work engaged in b y the organisation does not of itself determine whether it is a profit-orientated or profit organisation; a business can b e involved in providing medical o r education services just as much as can a

not-for-charitable or government organisation

Examples of not-for-profit organisations:

• A stakeholder is a person w h o has an interest of some kind in the business.

• A company's primary stakeholders are its shareholders The primary stakeholders in a sole tradership o r partnershipalso comprise t h e business's owners Secondary stakeholders in a business are directors/managers, employees,

customers, suppliers, lenders, government and its agencies, the local community, the public at large and the naturalenvironment

You can see from Figure 1.1, Profit and not-for-profit organisations, that a profit-oriented business exists primarily tomaximise the wealth of its owners, while a not-for-profit organisation (such as a charity or a government department)

exists primarily to provide services (and/or goods) for its beneficiaries.

In both cases the organisations have stakeholders w h o are interested in what the organisation does.

Definition

Stakeholder: Literally a person o r group of persons w h o has a stake in the organisation This means that they have an

interest to protect in respect of what the organisation does and how it performs

Professional skills focus: Assimilating and using information

The examiner may test your ability to identify a n d use relevant information in t h e scenario to determine what the primary

and secondary objectives of an organisation are

A company's primary stakeholders are its shareholders It is their money, invested in the business, which is literally 'at

stake' because it can be lost if the business performs badly, though i t can earn a decent return if t h e business does well

The company owes i t t o t h e shareholders to look after their interests, b u t it also has secondary stakeholders to w h o m it

has responsibilities, and w h o may p u t it under pressure

Stakeholders in a business What is at stake? What do they typical ly

expect of the business?

PRIMARY Sha reholders ( o r pa rtners or

proprietor)

Money invested A return o n their investment

so that their wealthincreases:

• Steady, growing profitspaid o u t by t h e business

• Growth in the capitalvalue of their share of t h ebusiness

Pension

good quality and valueFair terms of tradeContinuity of supply

Suppliers The items they supply Fair terms of trade

Prompt paymentContinuity of custom

Reasonable sustainablebusiness practicesCompliance withregulations

Steady o r rising stream oftax revenue

Analysts/ advisers/experts Time spent

Their reputation

Accurate and honestinformation from thebusiness

Continuity of customPrompt payment

The local community andthe public at large

National infrastructure used

by businessThe welfare of employees

Reasonable employmentand other businesspractices

The natural environment The environment shared by

all

Reasonable environmentaland other business

practices

Interactive question 1 : Corporate responsibility: Environmental, social and economic expectations

What expectations would the local community have of a company operating a gas-fired power station within two miles of

4 J The hierarchy of objectives

The fact that a business is oriented towards making a profit means that the simple answer to the question ‘what are thebusiness's objectives?' is: making as much profit as possible so as to increase shareholder wealth

In fact there is a hierarchy of objectives, with o n e primary objective and a series of secondary (subordinate) objectives,

which should combine to ensure the achievement of the primary objective

4 1 1 Primary objective

For a business the primary objective is financial: making as much profit as possible (profit maximisation) so as to increase

sha reholder wea Ith.

• Profit is revenue less costs It measures how the business creates value by making sure the cost of inputs (labour,

materials and finance) is less than the output (revenue generated)

• Shareholder wealth can only be maximised if profit is earned at an acceptable level of risk: focusing solely o n

maximising profit and ignoring risk can lead t o decreased shareholder wealth (and financial collapse) Avoiding

unnecessary risk should g o hand-in-hand with making profits so as to maximise shareholder wealth

• Profit cannot be pursued at any cost Any business is subject to the laws and regulations of the country in which it operates, and it also has social responsibilities, as we saw briefly above.

■ Employees and management

Train employees in necessary skills; reduce the number of employees leaving and having to be replaced (labour

turnover); create an innovative, flexible culture; employ high quality leaders

Professional skills focus: Concluding, recommending and communicating

Recommendations for o n e business may not be appropriate for another if the two businesses have different primary o rsecondary objectives

4.2 Is wealth maximisation always the primary objective?

Where the person w h o has p u t t h e i r money at stake (often called the 'entrepreneur') is in full managerial control of the

business, as in the case of a small owner-managed company o r partnership, assuming wealth maximisation as t h e primarywould seem to b e very reasonable Even i n companies owned by shareholders, but run by non-shareholding managers,

we might expect the wealth maximisation assumption to be valid

However, managers d o not necessarily make decisions that will maximise shareholder wealth.

• They may have no personal interest in t h e creation of wealth, except insofar as they are accountable to owners.

• The market may lack competitive pressure to be efficient by minimising costs and maximising revenue, for example

where there are few businesses in the market

4.2.1 Profit satisficing

Decisions might b e t a k e n by managers with their own managerial objectives in mind rather than the aim of wealth

maximisation A company's managers may choose to achieve simply a satisfactory profit, by operating at profit and risklevels which are acceptable to shareholders, and which provide enough profits for future investment in growth, b u t which

are not designed actively to maximise profit and shareholder wealth This is called 'satisficing' and is linked to a view of the strategy process called 'bounded rationality' p u t forward b y the economist Herbert Simon - an issue we shall return to

in the chapter, Introduction to business strategy

4.3 Environmental, social and governance (ESG)

While wealth maximisation may b e the primary objective for many businesses, there is increasing recognition that factorsother than financial performance affect t h e value of a business Even where shareholders only wish to consider their

wealth, factors referred to as environmental, social and governance issues should b e considered alongside financial

performance to understand how they may affect the risk and return of their investments ESG is frequently used

terminology in corporate and investment communities

• Environmental: Issues relating to the quality and functioning of the natural environment and natural systems These

include biodiversity loss, greenhouse gas (GHG) emissions, climate change, renewable energy, energy efficiency, air,

water or resource depletion o r pollution, waste management, stratospheric ozone depletion, changes in land use,

ocean acidification, a n d changes to the nitrogen and phosphorus cycles

• Social: Issues relating to the rights, wellbeing and interests of people and communities These include human rights,

labour standards in the supply chain, child, slave a n d bonded labour, workplace health and safety, freedom of

association and freedom of expression, human capital management and employee relations, diversity, relations withlocal communities, activities in conflict zones, health and access to medicine, HIV/AIDS, consumer protection, andcontroversial weapons

• Governance: Issues relating to the governance of companies a n d other investee entities In the listed equity contextthese include board structure, size, diversity, skills and independence, executive pay, shareholder rights, stakeholderinteraction, disclosure of information, business ethics, bribery and corruption, internal controls and risk management,and, in general, issues dealing with the relationship between a company's management, its board, its shareholders andits other stakeholders This category may also include matters of business strategy, encompassing both the implications

of business strategy for environmental and social issues and how the strategy is to b e implemented

• Ethical behaviour: While not specifically included i n the ESG acronym, ethical behaviour underlies all three of the

factors Ethics is about d o i n g the right thing, from a moral perspective Organisations may pursue objectives relating to

ESG even if they reduce financial wealth because they believe that it is ethically correct to pursuethose objectives Investors are increasingly expecting the companies they invest i n to a d o p t objectives relating to ESG, in addition to

financial objectives ESG is discussed again later in this chapter.

5 Mission, goals, plans and standards

Section overview

* A business's planning and control cycle ensures that its objectives, mission and goals are met b y setting plans,

measuring actual performance against plans, and taking control action

■ The direction of the business is expressed in its mission, which sets out its basic function i n society in terms of how itsatisfies its stakeholders

* The mission encompasses the business's purpose, strategy, policies, standards of behaviour a n d values

* The business's goals can be classified as its aims (which are non-operational and qualitative) and its operational,

quantitative objectives

• Operational objectives should be SMART: specific, measurable, achievable, relevant and time-bound

• Plans and standards set o u t what should b e d o n e to achieve the operational objectives

• The organisation's plans are a result of its strategic planning process

5 J Planning and control system

Businesses need to direct their activities by:

• deciding what they want to d o to achieve their primary objective - these become detailed objectives that the businesssets out to achieve, such as 'grow revenue by 20%' o r 'reduce costs by 1 0%';

“ deciding h o w and when to d o it and who is to d o it (setting plans a n d standards);

• checking that they achieve what they want, by measuring and monitoring what has been done a n d comparing it with

t h e plan; and

• taking control action to correct any deviation

The overall framework for this is the system of planning and control i n Figure 1.2.

O n target

No correctiveaction required

ComparisonPlans and

standards

Actualperformance

with plans/standards

Contrail action? Control action?

Deviations

identified

Figure 1 2: Planning and control system

Where there is a deviation from plan, a decision has to be made as to whether to adjust the plan (because it was

unachievable) or adjust how the plan is performed (because performance was sub-standard)

Professional skills focus: Structuring problems and solutions

Plans and standards should always b e set in relation to the objectives of the organisation Actual performance must relate

to how well t h e organisation is performing against these objectives

5.2 Mission

The overall direction of a business is set by its mission

Mission: 'The business's basic function in society 1 expressed in terms of how it satisfies its various stakeholders

Elements of mission Comments

Purpose Why does the organisation exist and for whose benefit (eg, shareholders)?

Strategy What is the operational logic of the organisation:

Values What does the organisation believe to be important - what are its core principles?Even though the mission may b e very general, you can see it should have real implications for t h e policies and activities ofthe organisation, and how individuals g o about what they do

5.2.1 Vision

Some businesses also have a vision of the future state of the industry or business which determines what its mission

should be For instance, 'being the leading provider of X by 2020' is a vision of a business's future, which ties it in to a

mission of 'providing high-quality, environmentally-friendly X to all our customers'

5.3 Goals: aims and objectives

Definition

Goal: 'A desired e n d result' (Shorter Oxford English Dictionary, 2007)

Identifying goals give flesh to a business's mission There are two types of goal:

• non-operational aims, o r qualitative goals - for example, a university's aim may be 'to seek truth' (You would not see:

'increase truth by 5%')

• operational objectives, o r quantitative goals - f o r example, 'to increase sales volume by 1 0%'

Characteristics of operational objectives Example

Objectives should be SMART:

* Operational aim: cut costs

• Operational objective: reduce b u d g e t e d expenditure

o n office stationery by 5% by 31 December 20X9

Interactive question 2: Goals

Most organisations establish quantifiable operational goals (objectives) Give reasons why non-operational goals (aims)might still be important

5.3.1 The purpose of setting operational objectives in a business

■ Implement the mission, by setting out what needs to be achieved.

• Publicise the direction of the organisation to managers and staff, so that they know where their efforts should b e

directed

“ Appra ise whether decisions a re valid, by assessing whether these are sufficie nt to achieve the stated objectives.

• Assess and control actual performance, by using objectives as targets for achievement.

5.4 Plans and standards

Definition

Plans: State what should be done to achieve t h e operational objectives Standards and targets specify a desired level of

performance

The desired level of performance for what is d o n e can be expressed as a standard to b e met, in terms of:

• Physical standards eg, units of raw material per unit produced

■ Cost standards These convert physical standards into money measurement by the application of standard prices For

example, the standard labour cost of making product X m i g h t be 4 hours at £12 per hour = £48

• Quality standards These can take a variety of forms, such as percentage of phone calls answered within three rings

(customer service quality standard)

5.5 How are plans set?

The strategic planning process, which we shall see in detail in the chapter, Introduction to business strategy, sets the

overall mission, goals, plans and standards that the business will try to achieve

6 Sustainability

Section overview

• Sustainability means meeting the needs of the present without compromising t h e ability of future generations to meet

their own needs There is increasing pressure o n organisations to a c t i n a sustainable manner

• Sustainability issues external to t h e organisation can be considered under three headings - social, environmental and

economic (SEE) or under the headings people, planet and profit

• Environmental, social and governance(ESG) describes an organisation s internal approach to addressing sustainability.

• Climate change refers to the long-term shifts in temperature as a result of increased greenhouse gas (GHG) emissions.

Climate change is considered to b e the defining issue of our time by the United Nations.

• The UN has adopted an agenda f o r sustainable development that includes 1 7 sustainable development goals.

■ Business activity contributes to climate change, for example by exacerbating the emissions of greenhouse gasses.

Organisations also suffer the consequences of climate change.

• The role of accountants in respectof climate change and sustainability is not to b e campaigners o r to analyse the

causes and consequences of climate change but to help companies in selecting and implementing solutions.

6.1 What is sustainability?

Definitions

Sustainability: Sustainability is a broad term that encompasses an environmental a n d social focus to improve people's

lives and improve the planet for the long-term The technical definition of sustainability comes from the 1 9 8 7 Brundtland

Report and is defined as development that 'meets t h e needs of the present without compromising the ability of future

generations to meet their own needs'

Sustainable development: Aims to ensure that economic activity can continue without causing permanent harm to society

and the planet It describes a world of thriving economies and just societies based o n what nature can afford

Natural capital: The stock of renewable and non-renewable natural resources that combine to yield a flow of benefits or

'services' to people (ie, biodiversity of plants and animals, air, water, soils, minerals) Components of natural capital includefossil fuels, minerals, metals and water The flows can b e ecosystem services o r abiotic services which provide value tobusiness and to society

Ecosystem services: The benefits to people from ecosystems, such as timber, fibre, pollination, water regulation, climate

regulation, recreation, mental health, and others

Abiotic service: Benefits to p e o p l e that d o n o t depend o n ecological processes b u t arise from fundamental geologicalprocesses a n d include the supply of minerals, metal and oil and gas, as well as geothermal heat, wind, tides and t h e

annual seasons

Biodiversity: Biodiversity is all t h e different kinds of life you'll find in o n e area - the variety of animals, plants, fungi, and

even microorganisms like bacteria that make u p our natural world Each of these species a n d organisms work together inecosystems like an intricate w e b to maintain balance and support life Biodiversity supports everything in nature that weneed to survive - food, clean water, medicine, and shelter (WWF, 2023)

Biodiversity is critical to the health and stability of natural capital as it provides resilience to shocks like floods and

droughts, and it supports fundamental processes such as t h e carbon a n d water cycles as well as soil formation Therefore,biodiversity is b o t h a part of natural capital and also underpins ecosystem services {Natural Capital Coalition (2016))

Enterprise value: Enterprise value reflects expectations of the amount, timing and certainty of future cash flows over the

short, medium and long t e r m and the value of those cash flows in the light of the entity's risk profile and its access to

finance and cost of capital The information contained in its financial statements and the information included in an entity'ssustainability-related financial disclosures are essential inputs to a primary user's assessment of an entity's enterprise value(Chartered Accountants Worldwide, 2022)

Social value: An organisation's desire to g e t the best value for money i n terms of profits a n d financial success for the

company, as well as generating long-term positive impacts for local communities, the environment, and other externalparties It marks an o n g o i n g ambition to make a difference to society in some way (Impact, 2023)

Sustainability concerns the use of both of the following:

■ tangible resources such as natural capital (raw materials) and energy

• intangible resources such as human/intellectual capital, and relationships with stakeholders

Sustainability is not limited to the environment Interpretations of the scope of sustainable development have developed

from a narrow interpretation which focused o n 'green issues' to broader interpretations which include concerns such as:

• increasing extremes of poverty and wealth

• bribery and corruption

Sustainability describes a world of thriving economies and just societies based on what nature can afford It incorporates consideration of both the impacts and dependencies of an organisation (see below) and so includes those factors that are

material both to t h e organisation b u t also to society

Organisations are increasingly being held to account for the wider impact their activities are having o n society While

economic activity makes positive contributions to society, such as providing employment and producing vital goods and

services, it can also have adverse effects Exacerbation of climate change, destruction of ecological systems, and failure to

look after the welfare of employees are some of the ways i n which economic activities by organisations have the potential

be of benefit to the communities it is part of and the environment It is of interest to the business's wider stakeholders.

6.1.1 Impacts and dependencies

There are two fundamental aspects to sustainability:

an organisation makes o r its actionseither positively or negatively affectenvironmental, social and governanceissues

Examples of impacts include workerrights, human rights, health and safetypolicy, waste, greenhouse gas

emissions, water usage, land usage

a n d biodiversity

current and future environmental,social a n d governance issues canaffect the organisation's ability tocreate and maintain value

Examples of dependencies which mayaffect an organisation are workerhealth, workplace diversity, climaticconditions, resource availability,regulation, consumer expectations,other stakeholder expectations, andrisks to organisational reputation

Information on impacts is generally useful for broader stakeholders, including consumers, civil society and employees.

The decisions they make are more attuned to information o n how an organisation is impacting o n livelihoods, for example,deforestation, equality a n d health An organisation's impacts can also b e financially material d u e to reputational impactssuch as reduced consumer demand or removal of license to operate

Information o n dependencies is generally more useful for investors, who want to assess how well a company is managing its exposure to long-term ESG risks, and hence assess t h e value of the company to inform investment decisions.

The International Federation of Accountants has prepared a useful visual of impact information a n d dependencies, whichcan b e found here: https://wwwjfac.org/knowledge-gateway/contributing-global-economy/publications/enhancing-corporate-reporting-su stainability-building-blocks

6.1.2 Sustainability frameworks

Frameworks, goals o r categories for sustainability can help to break it d o w n for practical application This is where

characterisations such as environmental, social and governance (ESG) or social, environmental, and economic (SEE) factors can be useful These categories help our understanding of the idea that a healthy environment underpins a healthy society which underpins a healthy economy.

6.1.3 Social, envi ronmentaland econom ic (SEE) framework

Sustainability can be considered under social, environmental and economic factors (often referred to using the SEE acronym) These categories are factors which are external to the organisation.

6.1.4 Social sustainability

Social sustainability involves meeting t h e needs of a wider group of stakeholders and society as a whole The

organisation's activities should not exploit o r harm any groups o r individual Examples of socially sustainable behaviour include fair treatment of employees, avoiding unethical activities and relationships such as bribery and corruption and

contributing to the societies i n which the organisations operate

6.1.5 Environmental sustainability

Environmental sustainability means that an organisation's activities do not harm nature or the biodiversity of the planet Natural capital, ecosystems and biodiversity are all important aspects of environmental sustainability Climate change is

also a major environmental concern

6.1 6 Economic (financial) sustainability

Economic activity and growth are sustainable if they can occur without harming social and environmental sustainability.

An organisation's activities are economically sustainable if the organisation can provide a return to its stakeholders over

the long term while meeting its obligations to society Some businesses and entrepreneurs take a very short-term view,

but o n e of the objectives of most businesses is to thrive in the long term

6.1.7 A balanced approach

In reality, organisations need to achieve a balance between the three factors It may not be possible for an organisation to

make a return to shareholders without harming nature (eg, an airline cannot operate without causing carbon emissions)

However, organisations can reduce t h e harm they cause, and take actions to remedy this (eg, many airlines encourage

passengers to contribute to the cost of planting trees, as these remove carbon dioxide from the atmosphere) Furtherdiscussion of the steps businesses can take to become more sustainable is discussed later in this chapter

6 1 8 Environmental, social and governance ( ESG) framework

We looked at environmental, social and governance (ESG) factors earlier in this chapter ESG approaches sustainability differently to the SEE framework ESG views sustainability through a corporate lens - it considers only how these risks and opportunities affect a business and its enterprise value Its approach to sustainability is internal to the organisation (how

the organisation is dealing with sustainability issues),

A difference between sustainability and ESG is that sustainability includes the concept of environmental and social limits within which there is a safe operating space - the ability of planet Earth to support life is not endangered and the ability of society to adapt to change is not overburdened ESG focusses o n enterprise value and so does not incorporate

considerations of a safe operating space

6.2 Triple bottom line

'The bottom line' is a term that is commonly used to refer to the bottom line of the statement of profit o r loss (the profit

aftertax), Historically the bottom line was seen as the most important indicator of an organisation's performance in the

eyes of its shareholders

In the 1990s John Elkington suggested that a broader view of an organisation's performance required a 'triple bottom line' The first bottom line is the 'people account', which indicates how socially responsible an organisation is The second

is the 'planet account', showing the ecological impact that an organisation has The third is the 'profit account' - t h e

traditional profit after tax.

Elkington's triple bottom line model was one of the first attempts to define a corporate reporting system that would

measure more than just the profits of a business The idea is that if organisations have to report on their people and

planet behaviour, then they would have an incentive to improve it In practice it can be difficult to quantify social and

environmental bottom lines, b u t organisations are encouraged to disclose more information about their activities in thisarea

Thanks to the introduction of the triple bottom line, many large multi-national companies began to pay more attention to the ethical standards of their suppliers, particularly where many activities had been outsourced to suppliers in countries

with low labour costs and lax regulations relating to the rights of workers

People, planet and profit are essentially the same as the social, environmental and economic aspects of sustainability

described above

6.3 Climate change and the environment

Definition

Climate change: Long-term shifts in temperatures and weather patterns Some of these shifts occur d u e to natural causes,

such as variations in the solar cycle Since t h e 1800s, human activities have been the main driver of climate change.

According to the United Nations, 'Climate change is the defining issue of our time, and we are a t a defining moment'.

Human activities contribute to climate change through the creation of greenhouse gases, principally carbon dioxide,

methane, nitrous oxide and ozone These are produced b y activities such as the burning of fossil fuels (eg, oil and coal),

deforestation and the use of landfill sites for waste disposal Greenhouse gasses(GHG) accumulate i n the earth's

atmosphere and trap the heat from the sun Climate change has many adverse effects, including severe weather

conditions (eg, droughts and floods) and melting polar ice caps leading to rising sea levels.

The Paris Agreement of 201 5 is an international treaty o n climate change that was signed by nearly 200 countries in 2015

at the United Nations Framework Convention o n Climate Change's 21 s t Conference of Parties, known as COP21.This

agreement is generally regarded as the framework for international action towards mitigating climate change and its

impacts The Paris Agreement set t h e ambition to a maximum of 2 °C global temperature change, with the preferred goal

of 1.5 °C above pre-industrial levels

In the UK, the government has committed to a legally binding target of net zero emissions by 2050 which correlates with

the UK commitment to limit temperature risks to 1.5 °C

Definition

Net Zero: Refers to the global reduction of greenhouse gas emissions to net zero by 2050 and is the action required to

limit temperature rise to 1.5 degrees Celsius

6.3.1 Greenhouse Gas (GHG) emissions - scope 1,2 & 3

The GHG Protocol Corporate Accounting and Reporting Standard published by ghgprotocol.org provides requirementsand guidance for organisations preparing a greenhouse gas (GHG) emissions inventory

This guide uses Scope 1,2 & 3 categorisation to define the scale of greenhouse gas emissions which are directly and

indirectly caused by an organisation

The scale of greenhouse gas emission levels is defined as follows.

* Scope 1: The GHG emissions that an organisation makes directly For example, running company factories, other

facilities a n d vehicles

■ Scope 2: The GHG emissions an organisation indirectly makes For example, purchasing electricity o r energy that is

produced on its behallf

• Scope 3: All the GHG emissions that an organisation is indirectly responsible for, u p and d o w n its value chain.

Downstream GHG emissions: GHG emissions from activities by an organisation's suppliers of raw materials, processed

materials, components and other products used for manufacture into new products For example, creation and use of

capital assets, energy used iin supplier factories, transport and distribution of raw materials

Upstream GHG emissions: GHG emissions which result from product use and e n d of product life treatment For example,

distribution of products to customers, energy consumed by product use, and e n d of product life disposal

6.4 UN Sustainable Development Goals

In September 201 5, the U N a d o p t e d the 2 0 3 0 Agenda for sustainable development This built o n earlier developments

and agreements to build a global partnership f o r sustainable development to improve human lives and protect the

environment At t h e centre of the agenda are the 1 7 sustainable development goals (SDGs)

The purpose of the Goals is to focus and help governments, businesses organisations, society and all individuals to cometogether and build a better future for everyone

The overall aims of the Goals are to end poverty, fight inequality and stop climate change The UN Global Compact is an

organisation that supports the SDGs by obtaining commitments from businesses to meet t h e principles a n d support theGoals

This is a list of the 1 7 U N SDGs:

Goal Meaning

1 N o poverty End poverty i n all its forms, everywhere

2 Zero hunger End hunger, achieve food security and improved nutrition, and promote

sustainable agriculture

3 Good health and wellbeing Ensure healthy lives and promote wellbeing for all at all ages

4 Quality education Ensure inclusive and equitable quality education and promote lifelong

learning opportunities for all

5 Gender equality Achieve gender equality and empower all women and girls

6 Clean water and sanitation Ensure availability and sustainable management of water and sanitation

for all

7 Affordable and clean energy Ensure access to affordable, reliable, sustainable and modern energy for

all

8 Decent work andeconomicg rowth Promote sustained, inclusive and sustainable economic growth, full and

productive employment, and decent work for all

9 Industry, innovation and infrastructure Build resilient infrastructure, promote inclusive and sustainable

industrialisation, and foster innovation

1 0 Reduced inequality Reduce inequality within and among countries

1 1 Sustainable cities and communities Make cities and human settlements inclusive, safe, resilient and

sustainable

1 2 Responsible consumption and

production

Ensure sustainable consumption and production patterns

13 Climate action Take urgent action to combat climate change and its impacts

1 4 Life below water Conserve and sustainably use the oceans, seas and marine resources for

sustainable development

1 5 Life on land Protect, restore and promote sustainable use of terrestrial ecosystems,

sustainably manage forests, combat desertification, halt and reverse land degradation, and halt biodiversity loss

1 6 Peacejustice and strong institutions Promote peaceful and inclusive societies for sustainable development,

provide access to justice for all, and build effective, accountable and

inclusive institutions at all levels

1 7 Partnerships for the goals Strengthen the means of implementation and revitalise the global

partnership for sustainable development

6.5 Actions to su pport sustai na bility

There are many actions that businesses can take to reduce their impact o n t h e environment and to increase their

sustainability

The 4Rs of recycling - 'reduce, reuse, recycle, replace' - is a useful framework for supporting sustainability:

• Reduce - reduce the amount of waste that is produced Waste is generally disposed of in landfill sites, which utilises land that could be used for other purposes and creates methane gasses, or it is burned in incinerators, which causes

greenhouse gasses.

■ Reuse - make or sell products in packaging that can be reused or recycled rather than single-use packaging {such as

single-use plastics) which cannot be recycled Plant and machinery could be upgraded or repaired rather than beingthrown away

• Recycle - avoid sending waste to landfill sites if it can be recycled Recycling reduces the use of new products (eg, the

cost of recycling aluminium drinks cans is approximately 10% of the cost of producing new aluminium from aluminiumore) It also reduces the use of landfill sites, which use another finite resource, ie, land

“ Replace refers to replacing resources that have been used For example, planting new forests to replace forests that

have been cut down for their timber

All the actions above are interlinked - reduce leads to less need to recycle, for example It also shows that sustainabilityand climate change are interlinked.

Mitigation hierarchies are another tool that businesses can use to reduce their impact o n the environment They are a

structured approach which prioritise actions i n a form of a hierarchy

The following is an example provided by the Institute of Environmental Management and Assessment (IEMA, 2020) Here the first rung of the hierarchy is 'Compensate', working up to 'Substitute', t h e n 'Reduce' and finally 'Eliminate', which is at

the t o p of the hierarchy

Element of hierarchy Description

production methods to prevent harmful emissions

changing the business model

Choosing suppliers that treat employees ethically

the local community, o r by offsetting carbon emissions

6.6 Role of accountants in sustainability and climate change

Accountants have a key role to play in helping organisations to manage their sustainability activities and their response toclimate change The role of the accountant is discussed in more detail in the chapter, The accountancy profession

Interactive question 3: Great Sportswear Limited

Great Sportswear Limited (GSL)isa UK-based company which sells branded sportswear throughout the world Many of itsbrands are promoted by well-known sports stars, who appear in GSL's advertisementsand wear its products when

BUSINESSOwnership

Further question practice

1 Knowledge diagnostic

Before you move o n to question practice, confirm you are able to answer the following questions having studied thischapter It not, you are advised to revisit the relevant learning from the topic indicated

Confirm your learning

1 Can you explain the differences between businesses and not-for-profit organisations? (Topic 2)

2 Can you identify the primary and secondary stakeholders of a business? (Topic 3)

3 Can you discuss why managers of a business many not always make decisions that maximise the wealth of

its owners? (Topic 4}

4 Can you give examples of objectives at each level of a hierarchy of objectives for a business? (Topic 5)

5 Can you explain the meaning of sustainability? A n d can you explain the three types of sustainability? (Topic

6)

6 Do you understand the effect of organisations o n climate change and the implications of climate change for

organisations? (Topic 6 ]

7 Can you explain the 'Triple bottom line' approach to corporate reporting? (Topic 6)

2 Chapter Self-test question practice

Aim to complete all self-test questions at the e n d of this chapter Once completed, attempt all questions i n the

Introduction to business chapter of the Business, Technology and Finance Question Bank Refer back to the learning in thischapter for any questions which you did n o t answer correctly or where the suggested solution has not provided sufficientexplanation to answer all youir queries Once you have attempted these questions, you can move o n to the next chapter,Managing a business

Technical references

“ C h a rte re d Acc ou nta nts Wo r I d w i d e (2 02 2 ), Sustainability Reporting an d En terprise Value - l/l/hy it is relevan t for in dustry

and profession [online] Available from:

https://charteredaccountantsworldwide.com/sustainability-reporting-enterprise-value-relevant-industry-profession/ [Accessed 20 June 2023].

• Drucker, RE (1954) The practice of management New York, Harper & Row.

• Impact (2023), Cutting through the jargon: what's the difference between CSR, social impact, and social value? [online].

Available from: https://impactreporting.co.uk/difference-between-csr-social-impact-and-social-value/ [Accessed 20 June 2023].

• Institute of Environmental Management and Assessment: GHG Management Hierarchy updated for net-zero [online]

Available from: https://www.iema.net/articles/ghg-management-hierarchy-updated-for-net-zero [Accessed 16 May 2023]

■ Natural Capital Coalition (2016) Natural Capital Proto col [online] Available from:

https://capitalscoalition.org/capitals-approach/natural-capital p rotoco I/ ?fwp_filter_tabs=training_mate ria I [Accessed 16 May 2023].

• Simon, H A ( 1 947 ) Administrative Behaviour: A Study of Decision-Making Processes in Administrative Organization.

New York, Macmillan Inc.

■ United Nations Department of Economic and Social Affairs: The 77 Goa/s [online] Available from:

https://sdgs.un.org/goalsIAccessed 16 May 2023]

• World Commission on Environment and Development (1 987) Our Common Future (Brundtland Report) United

Nations Available from https://sustainabledevelopment.un.org/content/documents/5987our-common-future.pdf [Accessed 16 May 2023]

• World Wildlife Fund: What Zs6/ocfrvers/(y?[online] Available from:

https://www.worldwildlife.org/pages/what-is-biodiversity#:~:text=Biodiversity%20is%20all%20the%20differentr maintain%20balance%20and%20support%20life [Accessed 22 May 2023]

Self-test questions

Answer the following questions.

1 What is an organisation?

2 List four ways in which organisations may differ from each other.

3 A government funded agency exists to provide services to a group of beneficiaries What would its secondary objective be?

4 What is a business?

5 What three things are normally expected of a business by its suppliers as stakeholders?

6 State two possible primary business objectives other than profit/wealth maximisation.

7 Define what is meant by a business's mission

8 Which of the following actions taken by a road haulage company would contribute to its social sustainability?

A Switching away from diesel-powered trucks to electrically propelled vehicles

B Taking the procurement director of a new customer o u t for lunch

C Providing proper breaks, health cover, and training for its drivers

D Entering into a long-term contract with a fuel provider to guarantee fuel supplies

9 Accountants provide advice to the organisations they work for o r the clients that they advise

Requirement

Which of the following statements is true in relation to the role of the accountant in respect of climate change?

A Accountants must ensure that organisations maximise profits regardless of their contribution to climate change

B Accountants should campaign to ensure that organisations take appropriate action to limit the volume of carbonemissions

C Accountants have a role to play in managing risks, including the risks related to climate change

D Accountants have no role in relation to climate change - that is the responsibility of scientific advisers

1 0 Inch pic's operational objective for its Yem manufacturing division is 'increasing manufacturing activities within a year' O nwhich of the SMART criteria for objectives does this objective fail?

A Specific

B Measurable

C Relevant

D Time-bounded

Now go back to t h e Introduction and ensure that you have achieved the Learning outcomes listed for this chapter

Answers to Interactive questions

Answer to Interactive question 1

The local community would expect jobs and therefore prosperity to flow from t h e company, as well of course as electricity

It would also expect safe operating practices and a long-term view taken of how t h e gas would be transported to thestation, and any waste would be transported from the site It would b e concerned about direct pollution from gases etc,and would expect the company to minimise these It would b e concerned about the possibility of gas explosions, andwould require reassurance about security procedures to deal with this risk People would also be concerned about t h eoverall effect o n the world’s environment, and would expect the company to make efforts to minimise its carbon footprint

Answer to Interactive question 2

Aims can b e just as helpful as quantifiable objectives Customer satisfaction, for example, is not something which isachieved just once Some goals are hard to measure and quantify, for example 'to retain technological leadership'.Quantified objectives are hard to change when circumstances change, as changing them looks like an admission ofdefeat: qualitative aims may support greater flexibility

Answer to Interactive question 3

• The lower cost of child labour may reduce t h e cost of the g o o d s produced for GSL, increasing GSL's profit margins.However:

• It is morally wrong and a breach of human rights to benefit from the exploitation of child labour, so f o r this reasonalone GSL should not consider continuing the relationship

• If GSL d i d continue the relationship, it is likely that customers would become aware of GSL's knowing use of childlabour, for example if a journalist discovered the matter This would d o huge damage to GSL’s reputation, leading topeople boycotting t h e company's products It is likely that the sports stars who promote the brands would no longerwish to be associated with the company which would destroy the value of its brands Therefore, from a business point

of view it would also not be advisable to continue with the partner - GSL would be seriously damaging its economicsustainability b y d o i n g so

Answers to Self-test q u e s t i o n s

1 An organisation is a social arrangement for the controlled performance of collective goals, which has a boundary

separating it from its environment

2 They may differ in terms of w h o owns them (public o r private), w h o controls their operations (owners o r managers), whatthey do, whether they are oriented towards making a profit, how b i g they are, their legal form (club, association, soletradership, partnership, o r company), where they get their money from and what technology they use

3 To minimise the costs of providing the services

4 A business is an organisation that is oriented towards making a profit for its owners, b u t t h a t can be regarded as an entityseparate from its owners

5 Fair terms of trade; prompt payment; continuity of custom

6 Profit satisficing a n d revenue maximisation

7 A business's mission is its basic function in society expressed in terms of h o w it satisfies its stakeholders.

8 C Providing proper breaks, health cover, and training for its drivers

9 C Accountants have a role to play in managing risks, including the risks related to climate change

1 0 B Measurable

The objective is time-bound and specific, as it is clear in which direction it wants activities to go Being related tomanufacturing it can be said to be relevant However, it gives n o indication of h o w the 'increase' is to be measured

Self -test questions

Answers to Interactive questions

Answers to Self-test questions

Learning outcomes

• Identify the functional areas within businesses (marketing, o pe ratio ns/p reduction, procurement, HR, IT and finance) andshow h o w the functions assist the achievement of business objectives

■ Identify the nature and functions of management, and show how this is influenced by human behaviour

Specific syllabus references for this chapter are: 1c, 1d

Syllabus links

The material in this chapter will be developed further in this assessment, and then in the Business Strategy and

Technology assessment at t h e Professional level

Assessment context

Questions o n the nature of management, business functions and organisational behaviour will b e set in the assessment ineither M C Q or multiple response format They will be either straight tests of knowledge or applications of knowledge to ascenario

Chapter study guidance

Use this schedule and your study timetable to plan dates o n which you will complete your study of this chapter

Topic Practical significance Study Approach Exam approach Interactive questions

1 - 4 Nature of management

Management is about

getting the people w h o

work for the business to

work effectively and d o t h e

right things to help the

business succeed Sections

1 - 4 introduce the

important terminology of

management which is then

built on later in the

chapter

Approach

Read sections 1 -4quickly to get an idea ofthe principles at issuewhen managing abusiness, then studyeach section againmore slowly, makingsure you learn t h edefinitions and candistinguish between theconcepts of power,authority, responsibility,accountability anddelegation Learn t h edifferent types of powerclassified according toCharles Handy Youshould learn too the distinctions between thedifferent types ofmanager, and the fourparts of the

management process

Stop and think

You may already haveexperience of beingmanaged, or even ofmanaging otherpeople What d o youthink makes a g o o dmanager, and whatexactly d o managersget u p to?

Questions o n the nature ofmanagement could easilyappear in the exam

Questions are likely to b ebased o n short scenarios,and test your ability to apply

t h e knowledge to these

Essential points are:

• Distinction betweenpower, authority,responsibility,accountability anddelegation

• Handy's power bases

I Q 1 : Management power

This question helps tounderstand t h edifferent powerclassifications