ACCA Strategic Professional · Advanced Financial Management

Corporate environmental, social, governance (ESG) and ethical issues: formula sheet

Full chapter guide

Key formulas

Core ethical principles (ACCA Code): Integrity, Objectivity, Professional competence and due care, Confidentiality, Professional behaviour; Use these as a checklist when a scenario describes pressure or a conflict of interest.
Stakeholder link to value: Value = PV of future free cash flows discounted at the cost of capital; ESG issues change either the cash flows (fines, costs, lost sales) or the discount rate (higher risk, lower access to finance). Say which one moves.
Adviser's response pattern: Identify issue → Assess impact → Evaluate options → Recommend → Communicate; A structure for written answers, not a numerical rule.
Shareholder return: Total shareholder return = (P1 − P0 + D1) ÷ P0; P0 is opening share price, P1 closing price, D1 dividend received. Use it to show how well shareholder wealth is being delivered.
Mendelow power-interest grid: High power + high interest = key players; high power + low interest = keep satisfied; low power + high interest = keep informed; low power + low interest = minimal effort; A framework for prioritising stakeholders when conflicts must be resolved.
Gearing impact on lenders: Gearing = Debt ÷ (Debt + Equity), or Debt ÷ Equity; State which version you use. Rising gearing helps shareholders through cheaper finance but worries lenders.
Interest cover: Interest cover = Profit before interest and tax ÷ Interest expense; Lenders watch this and covenants often set a minimum.
ACCA fundamental principles: Integrity, Objectivity, Professional competence and due care, Confidentiality, Professional behaviour; Memorise as IOCCP-style list. Name the specific principle breached rather than listing all five without application.
Threats to compliance: Self-interest, Self-review, Advocacy, Familiarity, Intimidation; Use to classify the threat in a scenario, then propose safeguards.
Avoidance versus evasion: Tax avoidance = legal minimisation of tax; Tax evasion = illegal non-payment through concealment or misstatement; Avoidance can still be unethical if it defeats the intent of the law or is artificial.
Arm's length transfer price test: Transfer price should equal the price independent parties would agree on comparable transactions; Prices set only to shift profit to low-tax jurisdictions raise ethical and legal risk.
Stakeholder impact test: Decision acceptable if benefits to stakeholders are fair, lawful and transparent, and you could defend it publicly; A practical check for judgement questions when no single rule applies.
Agency costs: Agency costs = monitoring costs + bonding costs + residual loss; Use this to structure any discussion of the cost of the agency problem.
Comply or explain: Comply with the code provision, or disclose and justify the departure; Core feature of principles-based codes. Do not describe it as optional to disclose.
Pay design test: Pay link = performance measure aligned to shareholder wealth, over a suitable time horizon; Use to judge bonuses, share options and long-term incentive plans.
Board balance rule of thumb: Independent NEDs, separate chair and CEO, committees chaired by independents; These are common code features, not a universal legal requirement in every country.
Triple bottom line: Performance = Economic (profit) + Social (people) + Environmental (planet); A framework, not a calculation. Use it to structure discussion of non-financial impacts.
NPV including environmental items: NPV = Σ [ (operating cash flows ± environmental costs and benefits) ÷ (1 + r)^t ] − initial investment; Include only relevant, incremental cash flows. Clean-up, carbon costs, permits, fines, subsidies and savings all count if they arise because of the project.
Cost of an environmental tax or carbon charge: Annual cost = tonnes of emissions × price per tonne; Check whether the price is expected to rise. Apply inflation or a stated increase to each year.
Decommissioning or restoration cost: PV = future cost ÷ (1 + r)^n; Late outflows have a lower present value, but they still reduce NPV and should be flagged as a risk.
Sustainability-adjusted discount rate (judgement): Adjusted rate = base rate ± premium or discount for environmental risk; A judgement, not a fixed rule. State it as an assumption and prefer cash flow adjustment where you can estimate the effects.
Value link: ESG factors → cash flows and risk → cost of capital → company value; Use this chain to justify any ESG point in financial terms.
Six capitals of integrated reporting: Financial, manufactured, intellectual, human, social and relationship, natural; Name them and show how the business uses and affects each.
ISSB standards: IFRS S1 = general sustainability-related disclosures; IFRS S2 = climate-related disclosures; Audience is investors and lenders, with a focus on enterprise value.
Green bond test: Proceeds ring-fenced for eligible environmental projects + reporting on use of proceeds + ideally external review; A bond without these features is a normal bond with a green label.
Net benefit of an ESG project: NPV = PV of savings and revenues − PV of costs − initial investment; Use your normal discount rate. Add any lower financing cost only if the question gives it.

Quick revision

As adviser, be objective, act with integrity, and give clear advice to the board even when it is unwelcome.
Stakeholder interests often conflict, so say whose interest you favour and why.
Shareholder wealth maximisation is the usual aim, but long-term value depends on managing other stakeholders.
Agency problems arise when managers act in their own interest rather than the owners' interest.
Governance tools include independent non-executives, board committees, and pay linked to long-term performance.
Short-term bonus targets can encourage risky or unethical behaviour.
Ethical dilemmas need facts, stakeholders, options and a reasoned decision, not just an opinion.
Environmental and social issues can affect cost, revenue, risk and access to finance.
Sustainability means meeting present needs without harming future generations' ability to meet theirs.
Integrated reporting explains how the organisation creates value over time using different forms of capital.
Green finance funds projects with environmental benefits, but you should consider whether claims are genuine.
Always apply your points to the scenario and end with a clear recommendation.

Common mistakes

Writing a generic list of ethical principles with no link to the scenario. Fix: Choose the one or two principles that actually apply and tie each to a fact in the case.
Treating ESG as a purely non-financial topic. Fix: Always state the effect on cash flows, risk, cost of capital or access to finance.
Writing a generic list of stakeholders and their wants. Fix: Use only stakeholders in the scenario and cite specific facts or figures about each.
Treating shareholder and stakeholder approaches as opposites with no overlap. Fix: Explain that good stakeholder management usually supports long-term shareholder value, so they often align.
Listing the five fundamental principles without applying them. Fix: Pick the one or two principles that are actually at risk and explain how the facts breach them.
Treating legal as the same as ethical. Fix: Always ask a second question: even if legal, is it fair, honest and defensible to stakeholders?
Writing a textbook list of governance features without using the scenario. Fix: Quote scenario facts first, then name the relevant control and say why it matters here.
Saying share options always align directors with shareholders. Fix: Mention drawbacks: options reward upside only, can encourage excess risk or short-term share price manipulation, and may pay out for market rises unrelated to performance.
Writing generic points on sustainability that ignore the scenario. Fix: Tie every point to a named fact, figure or stakeholder in the case. Say what it means for this company's cash flow or risk.
Treating CSR and ESG as the same thing. Fix: Say CSR is the firm's own voluntary approach and ESG is a measurable framework used by investors and lenders to assess risk. Then show how they connect.

Exam tips

Always apply to the scenario. Quote a figure, a country or a stakeholder from the case in each paragraph.
Link every ESG point to value: cash flow, risk, cost of capital or access to finance.
Give a balanced view, then a firm recommendation. Markers reward judgement.
Use clear headings and short paragraphs in your answer, since professional skills marks cover structure and communication.
In ethics questions, show an escalation path: raise the concern, document it, go to the audit committee, take advice.
Always tie your discussion to the scenario. Generic stakeholder points score poorly and weaken professional skills marks.
Where figures are given, calculate something: cover, gearing, dividend change or adjusted NPV. It lifts a discussion answer into AFM standard.
Finish with a clear recommendation and say how you would balance the interests, as the requirement usually asks for advice.