ESG & Sustainability
Foundation

This unit introduces the financial logic underlying ESG analysis by surveying empirical evidence on the relationship between ESG performance and financial outcomes. It opens with a review of the historical development of ESG as an investment category, moving from early socially responsible investing (exclusion screens) to ESG integration (systematic inclusion of ESG data in valuation models) and then to active stewardship (investor engagement to change company behavior).

The unit examines published studies on the relationship between aggregate ESG scores and equity returns, credit spreads, and cost of equity. The evidence is presented with appropriate qualification: the relationship is not uniform across geographies, sectors, or time periods, and methodological differences across studies affect comparability. The unit maps the conditions under which ESG exposure has been associated with higher or lower financial risk premiums in the published literature, citing specific studies from 2015 to the present. The unit also introduces the concept of stranded asset risk as a specific mechanism through which transition-related ESG factors have caused measurable valuation adjustments in energy and extractives companies.

The depth of treatment is conceptual and evidence-based. The unit does not require learners to build financial models; it requires them to interpret evidence and articulate causal mechanisms. Worked examples are drawn from the manufacturing and extractives sectors.

This unit provides a working knowledge of the Sustainability Accounting Standards Board (SASB) materiality framework and its 77 industry-specific standards. SASB is introduced as a practitioner tool rather than as a regulatory requirement, distinguishing it from CSRD and ISSB, which carry mandatory disclosure obligations covered in F3. The unit explains how SASB identifies financially material topics for each industry through a process that combines investor evidence surveys, analysis of regulatory enforcement history, and examination of sector-specific operating models and cost structures.

Learners work through a SASB industry standard for one of the five module sectors in detail. The exercise involves reading the standard's three-column evidence table (accounting metric, unit of measure, and code), identifying which topics carry quantitative financial impact evidence versus qualitative evidence only, and mapping each topic to a financial statement category (revenue, cost of goods sold, operating expenses, capital expenditure, or liability exposure). The exercise does not require financial modelling; it requires reading comprehension and logical mapping.

This unit draws on SASB methodology documentation and the SASB Materiality Map as primary source materials. The unit explicitly does not cover GRI Topic Standards or ISSB disclosure requirements, which appear in F3 and Track 2 respectively.

This unit examines how institutional investors use ESG data and engagement to influence capital allocation and corporate behavior. It covers the PRI (Principles for Responsible Investment) signatory framework, the obligations signatories accept regarding ESG integration and active ownership, and the mechanism through which PRI policy requirements have cascaded into changes in investor screening practices. As of 2024, PRI has over 5,000 signatories representing more than USD 121 trillion in assets under management.

The unit covers the three major ESG ratings agencies relevant to this programme: MSCI (which rates approximately 14,000 companies on a seven-point scale from CCC to AAA), Sustainalytics (which produces ESG Risk Ratings measuring unmanaged risk on a 0 to 40 scale), and S&P Global (which produces ESG scores aligned to DJSI methodology). For each, the unit covers the input data categories, the weighting methodology, the governance flags and controversy scoring, and the output format used in investor screening. The comparison illustrates that different agencies produce different ratings for the same company, and the unit provides a framework for understanding why this occurs.

The unit closes with a review of the engagement and divestment channels through which investors translate ESG assessments into corporate financial consequences. It draws on documented cases of engagement campaigns affecting capital costs and cases where index exclusion or divestment campaigns preceded credit rating changes.

This unit maps specific ESG factors to financial statement impacts across the three channels introduced in Unit F1.1, providing the detailed causal linkages that the risk register exercise in Unit F1.5 requires. The revenue channel covers the mechanisms through which ESG performance affects customer access, product premium, brand value, and contract eligibility. Specific cases cover green procurement policies in public sector contracts, consumer preference studies in consumer goods, and supply chain qualification requirements in manufacturing.

The cost channel covers the mechanisms through which ESG conditions affect operating expenses. It covers carbon pricing mechanisms (emissions trading schemes and carbon taxes), the geographic and sectoral coverage of active carbon pricing regimes as of the current module date, and the forward-looking trajectory of carbon price ranges under IEA Net Zero and Stated Policies scenarios. It also covers labor-related costs and supply chain disruption costs from physical climate events. Each cost category is illustrated with a specific quantified example.

The capital channel covers the mechanisms through which ESG risk exposure affects borrowing costs, insurance availability, and asset write-down requirements. It covers the relationship between ESG ratings and investment-grade bond spreads, the emerging market for sustainability-linked loans and bonds, and the physical risk asset impairment cases documented in insurance sector reporting.

This unit guides learners through the construction of an ESG risk register structured for presentation to a board of directors or executive committee. The risk register is the module's capstone deliverable. It applies the SASB materiality framework from Unit F1.2, the investor and cost channel logic from Units F1.3 and F1.4, and the financial materiality concept from Unit F1.1 to produce a structured document that links each material ESG topic to a financial consequence, an impact estimate, and a monitoring indicator.

The unit specifies the architecture of the risk register: eight columns covering topic description, relevant ESG category (E, S, or G), SASB code and evidence level, financial statement line item affected, estimated annual financial exposure (range), probability of crystallization within three years, risk owner, and leading indicator for monitoring. Learners complete this register for a case company drawn from the SASB sector they selected in Unit F1.2, ensuring continuity of the sector-specific learning thread across the module.

The risk register format introduced here is referenced in Track 1 Module B1 (Materiality Assessment Design) and Track 5 Module B5 (Climate Risk Taxonomy), both of which extend the register architecture for more specific purposes.

This unit introduces the GHG Protocol Corporate Standard as the reference methodology for all organisational emissions accounting in this programme. It covers the six Kyoto greenhouse gases (CO2, CH4, N2O, HFCs, PFCs, SF6) and the concept of CO2-equivalent (CO2e) conversion using global warming potential (GWP) values from the IPCC Fifth Assessment Report (AR5). The unit explains why GWP-100 (100-year time horizon) is the standard convention, and notes that some frameworks have begun referencing GWP-20 for methane.

The unit covers the three-scope boundary framework. Scope 1 covers direct emissions from sources owned or controlled by the organisation. Scope 2 covers indirect emissions from purchased energy (electricity, heat, cooling). Scope 3 covers all other indirect emissions in the value chain. The conceptual distinction between Scope 1 and Scope 2 is examined carefully, as learners frequently encounter confusion when mobile combustion of purchased fuel (Scope 1 for the purchasing company) intersects with fuel production emissions (Scope 3 Category 3 for the purchasing company).

The unit closes with the three boundary-setting approaches: equity share, financial control, and operational control. Each approach is defined, the conditions under which it produces a different organisational boundary are illustrated with a joint venture example, and the consistency requirement is explained. Learners complete a boundary-setting exercise using the joint venture case before moving to Unit F2.2.

This unit covers the identification and calculation methodology for the four Scope 1 emission source categories. Stationary combustion covers boilers, furnaces, gas turbines, generators, and process heaters. The unit explains the difference between combustion-related emissions (CO2 from carbon content of the fuel) and process-related emissions (CO2 or other gases released by the chemical transformation of feedstocks). Mobile combustion covers company-owned or leased vehicles, aircraft, marine vessels, and off-road equipment, distinguishing distance-based and fuel-based calculation methods and explaining when each is appropriate given available data.

Process emissions receive specific treatment for two industry categories that appear in the programme's case dataset: refrigerant systems (which produce HFC fugitive emissions) and agricultural operations (which produce CH4 from enteric fermentation and N2O from fertilizer application). The refrigerant coverage is practical because refrigerant fugitives are present in almost every organisation with HVAC systems and are consistently among the least well-documented Scope 1 sources.

The unit provides a worked calculation for each source category using the case dataset, showing the activity data input, the emission factor selection with source citation, the calculation formula, and the resulting CO2e figure. The unit concludes with a summary Scope 1 table that learners complete before moving to Scope 2 calculation.

This unit covers the location-based method for calculating Scope 2 emissions from purchased electricity. Location-based reporting uses the average grid emission factor for the geographic region where electricity is consumed. The unit explains the concept of a grid emission factor (tonnes CO2e per megawatt-hour of electricity consumed), the sources from which grid factors are obtained for different geographies, and the hierarchy of factor specificity from national grid averages to subregional grid averages to cross-sector averages.

The unit pays particular attention to African, Southeast Asian, and Latin American electricity grid factor databases, reflecting the programme's emerging market orientation. It covers the IEA World Energy Statistics and Balances database, the African Development Bank regional grid studies, the US EPA eGRID database, and the DEFRA UK grid factors. The practical finding that grid factors vary by an order of magnitude between high-renewable grids (such as Norway at approximately 0.02 kg CO2e per kWh) and coal-heavy grids (such as South Africa at approximately 0.98 kg CO2e per kWh) is used to illustrate why location matters in corporate Scope 2 calculation.

The case dataset in this unit covers two manufacturing sites: one in a sub-Saharan African country with a coal-dominated grid and one in a European country with a mixed renewable grid. Learners calculate location-based Scope 2 for both sites and observe the magnitude difference.

This unit covers the market-based method for Scope 2 calculation, which applies when an organisation has entered into contractual arrangements for specific electricity supply that differ from the regional grid mix. The market-based method uses supplier-specific emission factors or energy attribute certificate (EAC) factors rather than grid averages. The unit explains the GHG Protocol hierarchy of evidence for market-based calculation: first, supplier-specific factors from contractual instruments; then, EAC-based factors (zero for the portion of consumption covered by retired EACs); then, residual mix factors from regional tracking bodies; and finally, location-based factors as the fallback.

Energy attribute certificates are explained in detail: Renewable Energy Certificates (RECs) in North America, Guarantees of Origin (GOs) in Europe, and I-RECs in emerging markets. The unit covers the conditions that must be met for an EAC to produce a zero-emission factor under GHG Protocol Scope 2 Guidance: the certificate must be issued for the same market boundary as the consumption, must be retired (not resold), must be from the same reporting year, and must have an additionality basis where this is required by the relevant reporting framework.

The case dataset includes one EAC instrument for the European site, allowing learners to calculate both location-based and market-based Scope 2 for that site and compare the two figures. The unit closes with a discussion of why both figures are required in disclosure and when each is more informative for different stakeholder audiences.

This unit addresses the quality dimension of emissions inventories, covering the concepts and controls required for an inventory that will be subject to third-party verification. It introduces the GHG Protocol data quality indicators: technological representativeness (does the emission factor reflect the actual technology used?), temporal representativeness (does the factor reflect current conditions?), and geographical representativeness (does the factor reflect the relevant location?). Each indicator is scored on a qualitative scale, and the aggregate score informs the inventory's uncertainty assessment.

The unit distinguishes between primary activity data (metered or directly measured quantities, such as utility bills or fuel purchase records) and secondary activity data (modelled or estimated quantities, such as spend-based proxies or physical quantity estimates from equipment nameplate values). It explains why higher-materiality source categories warrant investment in primary data collection and introduces the concept of a data improvement plan, which is a structured programme for upgrading data quality over successive inventory years.

The capstone deliverable for this module is a complete Scope 1 and Scope 2 inventory summary for the case company, structured in a format compatible with GHG Protocol reporting requirements and with columns for source description, activity data quantity and unit, emission factor and source, CO2e total, data quality rating, and uncertainty range. Learners also complete a brief verification readiness checklist identifying which sources have adequate documentation for external review and which require additional evidence before verification.

This unit covers the Corporate Sustainability Reporting Directive as the most extensive mandatory sustainability disclosure regime currently in force. It explains the three-wave implementation timeline: Wave 1 covers large public-interest entities already subject to the Non-Financial Reporting Directive (NFRD), with first reports due in 2025 covering the 2024 financial year. Wave 2 covers all other large EU companies meeting two of three thresholds (250 or more employees, EUR 40 million or more net turnover, EUR 20 million or more total assets), with first reports due in 2026. Wave 3 covers EU-listed SMEs, with phased requirements beginning in 2027. The unit also covers the Article 40 mechanism through which non-EU parent companies with either EU-listed securities or EU subsidiaries meeting the large-company threshold face consolidated CSRD reporting obligations.

The European Sustainability Reporting Standards (ESRS) are introduced as the technical disclosure standards that give CSRD its specific content requirements. The unit distinguishes the two cross-cutting standards (ESRS 1, which governs general principles including the double materiality assessment, and ESRS 2, which governs general disclosures) from the ten topic standards covering climate (E1), pollution (E2), water (E3), biodiversity (E4), circular economy (E5), own workforce (S1), workers in the value chain (S2), affected communities (S3), consumers (S4), and governance (G1).

The unit closes by addressing the voluntary SME standard (VSME) that EFRAG has developed for smaller companies not subject to mandatory CSRD, and the ESRS for third-country companies currently under development.

This unit covers the ISSB framework developed under the IFRS Foundation, focusing on the two standards issued in June 2023: IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures). It explains the ISSB's mandate as an investor-focused disclosure body, producing standards that enable capital market participants to assess sustainability-related risks and opportunities that affect enterprise value. This investor focus distinguishes ISSB from GRI (which addresses a broader stakeholder audience) and from CSRD (which mandates both financial and impact materiality disclosure).

The unit maps the jurisdictions that had announced adoption or intended adoption of ISSB standards as of the module date. As of mid-2026, Australia, Canada, New Zealand, Singapore, Nigeria, Egypt, and several other jurisdictions had either adopted ISSB standards or issued consultation drafts for adoption. The UK has published its UK Sustainability Disclosure Standards (UK SDS), which are substantially aligned to ISSB. The unit explains the concept of jurisdictional interoperability, whereby a company that prepares ISSB-aligned disclosure satisfies the climate-related disclosure requirements of multiple adopting jurisdictions through a single report.

The relationship between ISSB S2 and the TCFD (Task Force on Climate-related Financial Disclosures) is explained in full. ISSB S2 incorporates all TCFD recommendations and adds quantitative requirements for cross-industry metrics (absolute gross Scope 1, 2, and 3 emissions; transition and physical risk exposure analysis; and climate-related financial effects). The TCFD has confirmed that its monitoring role transfers to ISSB following S2 adoption.

This unit covers the Global Reporting Initiative Standards framework, focusing on the 2021 update. The GRI Standards are structured in three tiers: the Universal Standards (GRI 1, covering foundation principles; GRI 2, covering general disclosures; and GRI 3, covering material topics), the Sector Standards (providing sector-specific guidance on likely material topics), and the Topic Standards (covering specific environmental, social, and economic topics with detailed disclosure requirements). The unit explains how a company using GRI Standards selects applicable Topic Standards through its materiality assessment, which under GRI 2021 requires identifying the actual and potential impacts of the organisation's activities on people and environment.

The concept of impact materiality is examined in relation to financial materiality. Under GRI, a topic is material if the organisation has actual or potential, positive or negative, significant impacts in its value chain. The financial consequences of those impacts are secondary to the impact itself in determining materiality. This stands in contrast to ISSB and SASB, where financial consequence to the enterprise is the primary materiality criterion.

The unit also addresses the substantial structural alignment between GRI Topic Standards and CSRD/ESRS Topic Standards, a deliberate design decision by EFRAG. This alignment means that organisations already reporting under GRI 2021 have a significant head start on CSRD compliance. The unit maps the specific ESRS topic standards to their GRI counterparts, identifying where direct data reuse is possible and where CSRD requires additional disclosures beyond GRI.

This unit covers the CDP disclosure platform, which collects climate, water, and forest data from companies and public authorities on behalf of institutional investors, supply chain buyers, and city and regional networks. The CDP Climate Change questionnaire is the most widely used; as of 2023, approximately 23,000 companies disclosed to CDP, representing over 67 percent of global market capitalization.

The unit explains the CDP scoring methodology for the Climate Change questionnaire. Scores range from D (disclosure) to A (leadership), with intermediate levels of C (awareness) and B (management). Each score band corresponds to a set of disclosure completeness requirements and management capability criteria. The A-List designation requires that a company disclose verified emissions data, demonstrate a comprehensive climate risk assessment process, and show evidence of board-level oversight of climate strategy. The unit maps the specific questionnaire sections (governance, risk, business strategy, targets and performance, emissions methodology, scope 3) to their counterparts in CSRD/ESRS and ISSB S2.

The unit also covers the CDP supply chain programme, through which large purchasing companies (referred to as CDP supply chain members) require their suppliers to respond to the CDP questionnaire. As of 2023, 280 companies with combined purchasing spend of approximately USD 6.4 trillion use CDP to collect supplier climate data. For emerging market companies that supply to multinational buyers, CDP disclosure is increasingly a commercial requirement rather than a voluntary act.

This unit applies the framework knowledge from Units F3.1 through F3.4 to a structured decision-making exercise using five entity profiles. For each profile, learners work through a decision tree that asks: Is the entity subject to CSRD mandatory requirements (and under which wave)? Is it subject to ISSB adoption requirements in its primary jurisdiction? Does it have institutional investor, stock exchange, or DFI disclosure requirements that effectively mandate ISSB or TCFD-aligned disclosure? Does it have supply chain buyer requirements that necessitate CDP participation? Does it choose GRI as a voluntary framework to serve stakeholder communication needs?

The output for each profile is a frameworks matrix showing which disclosures are mandatory, which are effectively required through commercial relationships, and which are optional. The matrix then maps to a three-year compliance calendar that sequences the key activities: double materiality assessment or financial materiality assessment, data infrastructure preparation, first-year disclosure production, assurance engagement, board approval, and publication. The calendar exercise requires learners to identify which activities are on the critical path and which can be sequenced to reduce resource burden — for example, by running the GHG Protocol Scope 1 and 2 inventory once and using it across CSRD, ISSB, and CDP rather than producing separate inventories for each.

The capstone deliverable for this module is a completed compliance calendar and frameworks matrix for one of the five entity profiles chosen by the learner. The deliverable also introduces the concept of a regulatory horizon scan, which is developed into a full analytical tool in Track 9 Module 1.3 (Climate Policy Intelligence).