ICAEW SE · Chapter 4
Sustainability in business MCQs with Answers
18 multiple-choice questions on Sustainability in business for ICAEW SE Sustainability and Ethics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is an external influence on a company's sustainability strategy?
- A) The company's own internal recycling policy
- B) Investors asking for evidence of how the company manages climate-related risks
- C) The personal hobbies of the finance director
- D) The colour scheme of the company's head office
Show answer & explanation
Answer: B) Investors asking for evidence of how the company manages climate-related risks
Investor pressure is an external influence that can shape strategy, along with customers, regulators, competitors and wider society. An internal recycling policy is a result of strategy rather than an external influence, and the other options are irrelevant to sustainability strategy.
Question 2
Which of the following is a common barrier to progress in corporate sustainability?
- A) Strong demand from customers for sustainable products
- B) Short-termism, where management focuses on quarterly or annual results at the expense of long-term investment
- C) Clear and reliable sustainability data
- D) Government grants for low-carbon investment
Show answer & explanation
Answer: B) Short-termism, where management focuses on quarterly or annual results at the expense of long-term investment
Short-termism discourages investment whose benefits arrive in the long term, which is typical of many sustainability initiatives. Other barriers include upfront costs, lack of reliable data and lack of skills. Customer demand, good data and grants are enablers rather than barriers.
Question 3
A fruit grower relies on wild bees to pollinate its orchards. In sustainability terms, how is this best described?
- A) An impact on nature
- B) A transition risk
- C) A dependency on nature
- D) A Scope 3 emission
Show answer & explanation
Answer: C) A dependency on nature
A dependency is a reliance on natural, social or other resources that a business needs to operate, such as pollination services. An impact is the effect the business has on people or the environment. If bee populations declined, this dependency would create a risk for the grower, showing how dependencies can lead to risks.
Question 4
A warehouse company faces two climate-related risks: (1) its site is increasingly likely to be flooded in severe storms, and (2) average summer temperatures are gradually rising, increasing cooling costs. How should these risks be classified?
- A) (1) Chronic physical risk; (2) acute physical risk
- B) (1) Transition risk; (2) acute physical risk
- C) (1) Acute physical risk; (2) chronic physical risk
- D) (1) Acute physical risk; (2) transition risk
Show answer & explanation
Answer: C) (1) Acute physical risk; (2) chronic physical risk
Physical risks arise from the physical effects of climate change. Acute physical risks are event-driven, such as storms and floods, whereas chronic physical risks result from longer-term shifts, such as rising average temperatures. Transition risks arise from the move to a low-carbon economy, such as policy or market changes.
Question 5
A government introduces a new carbon tax that significantly increases the operating costs of a cement manufacturer. What type of climate-related risk is this?
- A) Acute physical risk
- B) Transition risk (policy and legal)
- C) Chronic physical risk
- D) Credit risk
Show answer & explanation
Answer: B) Transition risk (policy and legal)
Transition risks arise from policy, legal, technology, market and reputational changes as the economy moves towards lower emissions. A new carbon tax is a policy change, so it is a policy and legal transition risk. It is not caused by the physical effects of climate change.
Question 6
A logistics company replaces its diesel vans with electric vehicles and finds that its fuel and maintenance costs fall. Which type of sustainability-related outcome is this?
- A) A physical risk
- B) A dependency
- C) Greenwashing
- D) An opportunity arising from resource efficiency
Show answer & explanation
Answer: D) An opportunity arising from resource efficiency
Sustainability is not only about risk; it also creates opportunities such as lower costs through resource efficiency, new products and markets, and improved resilience. Lower running costs from cleaner vehicles are an opportunity. The change does not involve misleading claims, so it is not greenwashing.
Question 7
Which statement best describes the difference between the effect of sustainability matters on 'enterprise value' and on 'social value'?
- A) Enterprise value refers only to charitable donations, whereas social value refers to share price
- B) Enterprise value and social value are identical, so a company that increases one always increases the other
- C) Enterprise value effects concern how sustainability matters affect the company's cash flows and value to investors, whereas social value concerns the company's effects on people, society and the environment
- D) Enterprise value concerns the company's effect on employees, whereas social value concerns its effect on shareholders
Show answer & explanation
Answer: C) Enterprise value effects concern how sustainability matters affect the company's cash flows and value to investors, whereas social value concerns the company's effects on people, society and the environment
Effects on enterprise value are the 'outside-in' effects of sustainability matters on a company's prospects, which is the focus of investor-oriented reporting. Social value reflects the 'inside-out' impacts of the company on society and the environment. The two often interact, for example when harmful impacts lead to regulation or reputational damage, but they are not identical.
Question 8
Which of the following is the defining feature of a green bond?
- A) The money raised must be used to finance projects with environmental benefits
- B) The interest rate is always lower than on government bonds
- C) The bond can only be bought by charities
- D) The bond has no repayment date
Show answer & explanation
Answer: A) The money raised must be used to finance projects with environmental benefits
Green bonds are 'use of proceeds' instruments: the funds raised are earmarked for eligible environmental projects, such as renewable energy or energy efficiency. They are typically supported by reporting on how the proceeds were spent. Their pricing, investor base and maturity are not what define them.
Question 9
A company takes out a sustainability-linked loan. Which feature distinguishes it from a green loan?
- A) The loan can only be spent on specific environmental projects
- B) The loan can be used for general purposes, but its interest rate varies depending on whether the company meets pre-agreed sustainability performance targets
- C) The loan is interest-free provided that the company publishes a sustainability report
- D) The loan must be repaid immediately if the company makes a loss
Show answer & explanation
Answer: B) The loan can be used for general purposes, but its interest rate varies depending on whether the company meets pre-agreed sustainability performance targets
Sustainability-linked loans link the borrowing cost to the borrower's performance against sustainability KPIs, such as emission reductions, rather than restricting how the money is spent. Green loans, like green bonds, restrict the use of proceeds to eligible green projects. Neither type is interest-free or automatically repayable on making a loss.
Question 10
A company commissions a life cycle assessment (LCA) of a product on a 'cradle-to-grave' basis. What will the assessment cover?
- A) Only the emissions from the company's own factory
- B) Only the impacts arising after the customer buys the product
- C) The financial profitability of the product over its life
- D) Environmental impacts from raw material extraction through manufacture, distribution and use, to final disposal
Show answer & explanation
Answer: D) Environmental impacts from raw material extraction through manufacture, distribution and use, to final disposal
Cradle-to-grave LCA covers every stage of a product's life, from extracting raw materials to disposal. A narrower 'cradle-to-gate' assessment stops when the product leaves the factory. LCA measures environmental impacts, not profitability.
Question 11
A drinks company is deciding whether to switch from glass bottles to a lighter plastic alternative. Why is a life cycle assessment particularly useful for this decision?
- A) It guarantees that the cheaper option is also the more sustainable one
- B) It removes the need to consider any social impacts of the decision
- C) It only measures impacts at the point of sale, so it is quick to complete
- D) It can reveal whether reducing impacts at one stage, such as transport, simply shifts greater impacts to another stage, such as disposal
Show answer & explanation
Answer: D) It can reveal whether reducing impacts at one stage, such as transport, simply shifts greater impacts to another stage, such as disposal
LCA looks at the whole life of a product, so it helps identify 'burden shifting', where an improvement at one stage creates larger problems elsewhere. Lighter packaging may cut transport emissions but increase waste or pollution at end of life. LCA does not guarantee cost savings and does not replace consideration of social impacts.
Question 12
A company tracks three measures: (1) water consumption, (2) employee injury rates and (3) the proportion of independent non-executive directors on the board. How would these be classified under ESG?
- A) (1) Social; (2) Environmental; (3) Governance
- B) (1) Environmental; (2) Social; (3) Governance
- C) (1) Environmental; (2) Governance; (3) Social
- D) (1) Governance; (2) Social; (3) Environmental
Show answer & explanation
Answer: B) (1) Environmental; (2) Social; (3) Governance
Water use is an environmental measure, employee health and safety is a social measure, and board independence is a governance measure. ESG factors are commonly used by investors and others to assess how a company manages sustainability-related matters.
Question 13
Two ESG rating agencies give the same company very different ratings. Which of the following is the most likely explanation?
- A) One agency must have made an arithmetic error, as ESG ratings are calculated using a single global standard
- B) ESG ratings are based only on share price, which varies between stock exchanges
- C) ESG ratings are set by the company itself, so they can choose any score
- D) The agencies use different methodologies, including different choices of which issues to measure, how to measure them and how to weight them
Show answer & explanation
Answer: D) The agencies use different methodologies, including different choices of which issues to measure, how to measure them and how to weight them
There is no single standard methodology for ESG ratings, so agencies differ in scope, measurement and weighting, and in the data they use. This divergence means users should understand what a rating measures before relying on it. Ratings are not based purely on share price and are not set by the company.
Question 14
Which of the following is the clearest example of greenwashing?
- A) A company labels a product 'eco-friendly' because its packaging is recyclable, although the product itself is made using highly polluting processes
- B) A company publishes verified data showing a fall in its emissions
- C) A company discloses that it missed its emissions target and explains why
- D) A company obtains independent assurance over its sustainability report
Show answer & explanation
Answer: A) A company labels a product 'eco-friendly' because its packaging is recyclable, although the product itself is made using highly polluting processes
Greenwashing is making misleading claims about environmental credentials, for example by highlighting a minor positive feature while ignoring significant negative impacts. Verified data, honest disclosure of missed targets and independent assurance all improve transparency and reduce the risk of greenwashing.
Question 15
A company has made real progress in reducing its emissions but decides to say nothing about it publicly because it fears criticism if it misses future targets. What is this practice called?
- A) Greenwashing
- B) Carbon offsetting
- C) Double materiality
- D) Greenhushing
Show answer & explanation
Answer: D) Greenhushing
Greenhushing is deliberately under-reporting or staying silent about sustainability performance or goals, often to avoid scrutiny. While less obviously harmful than greenwashing, it reduces transparency and makes it harder for stakeholders to assess performance and compare companies.
Question 16
A company reported total greenhouse gas emissions of 18,400 tonnes CO2e for the year and revenue of £230 million. What is its emissions intensity, measured in tonnes CO2e per £1 million of revenue?
- A) 0.0125 tonnes CO2e per £1 million
- B) 800 tonnes CO2e per £1 million
- C) 80 tonnes CO2e per £1 million
- D) 8 tonnes CO2e per £1 million
Show answer & explanation
Answer: C) 80 tonnes CO2e per £1 million
Emissions intensity = total emissions / revenue in £ millions = 18,400 / 230 = 80 tonnes CO2e per £1 million of revenue. Dividing revenue by emissions gives the inverse figure of 0.0125, which is not an intensity measure. Intensity ratios allow comparison between companies of different sizes, but they can fall even when absolute emissions rise.
Question 17
An oil company owns reserves that it may never be able to extract and sell profitably because of tighter climate regulation and falling demand. What term describes these reserves?
- A) Contingent liabilities
- B) Natural capital dependencies
- C) Intangible assets
- D) Stranded assets
Show answer & explanation
Answer: D) Stranded assets
Stranded assets are assets that suffer unexpected or premature write-downs or devaluations, often because of the transition to a low-carbon economy. They are a key consequence of transition risk and are relevant to the valuation of companies in carbon-intensive sectors.
Question 18
A company set a target to reduce its emissions by 42% from a baseline of 50,000 tonnes CO2e. Its emissions for the current year are 38,500 tonnes CO2e. By how many further tonnes CO2e must emissions fall from the current level to meet the target?
- A) 9,500 tonnes CO2e
- B) 11,500 tonnes CO2e
- C) 21,000 tonnes CO2e
- D) 16,170 tonnes CO2e
Show answer & explanation
Answer: A) 9,500 tonnes CO2e
The target level is 50,000 x (1 - 0.42) = 29,000 tonnes CO2e. The further reduction needed is 38,500 - 29,000 = 9,500 tonnes CO2e. The figure of 11,500 is the reduction already achieved (50,000 - 38,500), 21,000 is the total reduction required from the baseline, and 16,170 wrongly applies the 42% to the current year's emissions.