FSA Credential Level II cheat sheet

Materiality definition (SASB/FSA framing): information is material if a reasonable investor would consider it important in making an investment decision, or if omitting it would significantly alter the total mix of information available.

Materiality is industry-specific: the same topic (e.g., water use, labor practices) can be decision-relevant in one industry and immaterial in another; assess materiality relative to the company's business model, not in the abstract.

Financial materiality (outside-in) vs. impact materiality (inside-out): investment analysis primarily uses financial materiality - how sustainability factors affect cash flows, risk, and cost of capital - while impact materiality concerns effects on society/environment.

Three transmission channels from sustainability factors to value: (1) revenue/cost (demand shifts, input prices, litigation), (2) asset/liability valuation (impairments, stranded assets, remediation provisions), (3) cost of capital (risk premia, access to financing, insurance).

Materiality is time-horizon dependent: short-term effects (fines, supply disruption) versus long-term effects (transition risk, physical climate risk) must be evaluated on the same horizon as the investment thesis.

Double materiality requires assessing both financial materiality to the company and the company's impact on people/environment; use it when the reporting framework (e.g., CSRD/ESRS) mandates it, not as a universal analytical standard.

Materiality assessment process: identify relevant topics (peer, regulatory, stakeholder, industry standards) → evaluate likelihood and magnitude of financial effect → prioritize → document rationale and thresholds.

Quantitative thresholds are judgmental: a useful test is whether the item could move valuation, credit metrics, or covenant compliance by a meaningful amount relative to earnings, EBITDA, or enterprise value.

Immateriality must be actively justified: an item is not immaterial merely because it is hard to measure; disclose the assessment approach and any estimation uncertainty.

Key frameworks: ISSB IFRS S1 (general sustainability disclosures) and IFRS S2 (climate), GRI (impact reporting), ESRS (EU CSRD), TCFD (governance, strategy, risk management, metrics and targets), SASB (industry-specific metrics).

IFRS S2 requires disclosure of Scope 1, Scope 2, and material Scope 3 GHG emissions, climate-related physical and transition risks, resilience of strategy, and internal carbon prices if used.

Scope 1 = direct emissions from owned/controlled sources; Scope 2 = indirect emissions from purchased energy; Scope 3 = all other value-chain emissions (15 categories), often the majority of a company's footprint.

GHG Protocol calculation: emissions = activity data × emission factor; convert all gases to CO2-equivalent using global warming potentials (e.g., AR5/AR6 100-year GWP) for comparability.

Assurance levels: limited assurance (moderate, negative-form conclusion) vs. reasonable assurance (high, positive-form); limited assurance is the common starting point for sustainability data and affects reliability for analysis.

Quality-of-disclosure checks: consistency across years, comparability to peers, use of recognized methodologies, restatement history, boundary definitions (operational control vs. equity share), and availability of third-party assurance.

Integrate sustainability data into models by adjusting forecast revenue, margins, capex, working capital, and discount rate; avoid double counting when a factor is already reflected in market pricing.

Common analytical pitfalls: greenwashing (targets without baselines or capex plans), inconsistent units/intensity metrics, missing Scope 3, and unverified data; normalize to intensity metrics (per unit of revenue or output) for peer comparison.

Regulatory trajectory: ISSB adoption by jurisdictions, EU CSRD/ESRS with double materiality and assurance, and SEC climate rules (scope and timing subject to legal challenge) - track jurisdictional applicability for cross-border comparability.