ICAEW SE · Chapter 3
Regulation on sustainability MCQs with Answers
8 multiple-choice questions on Regulation on sustainability for ICAEW SE Sustainability and Ethics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A government is choosing between making climate disclosures mandatory by law and issuing voluntary guidance. Which of the following is an advantage of mandatory regulation over voluntary guidance?
- A) It is always cheaper for companies to comply with than voluntary guidance
- B) It improves consistency and comparability, because all entities in scope must report and cannot choose only favourable information
- C) It can be changed more quickly than guidance in response to new developments
- D) It allows each company to choose which topics to report on
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Answer: B) It improves consistency and comparability, because all entities in scope must report and cannot choose only favourable information
Mandatory regulation creates a level playing field because every entity in scope must comply, which improves comparability and reduces selective reporting. However, it typically raises compliance costs and is slower to change than guidance. Letting companies choose their topics is a feature of voluntary approaches.
Question 2
What is the central long-term temperature goal of the Paris Agreement adopted in 2015?
- A) To return global average temperature to pre-industrial levels by 2030
- B) To limit the increase in global average temperature to 3°C above current levels
- C) To ensure that developed countries reduce emissions while developing countries make no commitments
- D) To hold the increase in global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit it to 1.5°C
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Answer: D) To hold the increase in global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit it to 1.5°C
The Paris Agreement aims to keep warming well below 2°C above pre-industrial levels while pursuing efforts to limit it to 1.5°C. Countries set their own nationally determined contributions (NDCs) and all parties participate, unlike the earlier Kyoto Protocol, which placed binding targets mainly on developed countries.
Question 3
What is the main role of the Intergovernmental Panel on Climate Change (IPCC)?
- A) To assess and summarise the scientific evidence on climate change for policymakers
- B) To set legally binding emission limits for each country
- C) To issue sustainability reporting standards for listed companies
- D) To fine companies that exceed their emission allowances
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Answer: A) To assess and summarise the scientific evidence on climate change for policymakers
The IPCC is a UN body that assesses published research on climate change, its impacts and possible responses, and produces assessment reports for policymakers. It does not set binding limits, write reporting standards or enforce penalties. Its reports inform international negotiations under the UN climate framework.
Question 4
The UN Global Compact asks businesses to commit to ten principles. These principles cover which four areas?
- A) Human rights, labour, environment and anti-corruption
- B) Profit, growth, innovation and market share
- C) Audit, tax, financial reporting and assurance
- D) Health, education, housing and transport
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Answer: A) Human rights, labour, environment and anti-corruption
The UN Global Compact is a voluntary initiative under which companies commit to ten principles in the areas of human rights, labour, environment and anti-corruption. It is an example of an international organisation driving change through voluntary commitment rather than law.
Question 5
Under a 'cap-and-trade' emissions trading scheme, how is the cost of emitting greenhouse gases created?
- A) A limit is set on total emissions, allowances are issued up to that limit, and companies that emit more than their allowances must buy more from those that emit less
- B) Every company pays a fixed tax per tonne of emissions set by the government, with no overall limit
- C) Companies receive subsidies for each tonne of emissions they produce
- D) Companies are banned from emitting any greenhouse gases at all
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Answer: A) A limit is set on total emissions, allowances are issued up to that limit, and companies that emit more than their allowances must buy more from those that emit less
Cap-and-trade sets an overall cap on emissions and creates tradeable allowances. The market price of allowances puts a cost on emissions and rewards companies that cut emissions cheaply, as they can sell surplus allowances. A fixed charge per tonne without a cap describes a carbon tax instead.
Question 6
CDP (formerly the Carbon Disclosure Project) is a non-governmental organisation. How does it mainly drive sustainability change?
- A) By passing legislation that requires companies to report emissions
- B) By acting as the statutory auditor of company sustainability reports
- C) By running a global disclosure system through which companies, cities and others report environmental data, which investors and customers can use
- D) By issuing accounting standards for financial statements
Show answer & explanation
Answer: C) By running a global disclosure system through which companies, cities and others report environmental data, which investors and customers can use
CDP is an NGO that collects environmental disclosures on climate, water and forests and makes them available to investors and purchasers. Its influence comes from transparency and stakeholder pressure, not from law. NGOs cannot legislate, act as statutory auditors or set financial reporting standards.
Question 7
Sustainability reporting under the EU Corporate Sustainability Reporting Directive (CSRD), using the European Sustainability Reporting Standards (ESRS), is based on a particular materiality concept. Ignoring which companies fall within its scope and when, which materiality concept underpins this reporting?
- A) Financial materiality only, considering just the effects of sustainability matters on the company
- B) Impact materiality only, ignoring effects on the company's finances
- C) Double materiality, considering both the company's impacts on people and the environment and the sustainability matters that affect the company's financial position
- D) Quantitative materiality, set at a fixed percentage of profit before tax
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Answer: C) Double materiality, considering both the company's impacts on people and the environment and the sustainability matters that affect the company's financial position
The CSRD and ESRS use double materiality. A sustainability matter is material if it is material from an impact perspective (the company's effects on people and the environment, 'inside-out'), from a financial perspective (effects on the company's cash flows and financial position, 'outside-in'), or both. This differs from the ISSB standards, which focus on financial materiality for investors. Materiality is not set as a fixed percentage of profit.
Question 8
The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) were originally voluntary. Which statement best illustrates the trend from less prescriptive guidance to more codified regulation?
- A) The TCFD recommendations were withdrawn because no companies used them
- B) The TCFD recommendations were turned into a voluntary charity pledge with no reporting requirements
- C) The TCFD recommendations were built into the ISSB's IFRS S2 standard, which jurisdictions can then make mandatory for companies through law or listing rules
- D) The TCFD recommendations replaced all financial reporting standards
Show answer & explanation
Answer: C) The TCFD recommendations were built into the ISSB's IFRS S2 standard, which jurisdictions can then make mandatory for companies through law or listing rules
The TCFD framework, structured around governance, strategy, risk management and metrics and targets, began as voluntary guidance. Its structure was incorporated into IFRS S2 Climate-related Disclosures, and jurisdictions can adopt the ISSB standards as mandatory requirements. This shows the move from voluntary guidance to codified, enforceable standards.