AFA 511 Reviewer

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Toronto Metropolitan University *

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511

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Jun 21, 2024

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Lecture 1: Ethics in Reporting and Investing - How do ethics enter into how a firm makes its social and environmental decisions? - What are the personal considerations regarding you firm’s social and environmental performance? - What is the purpose of your sustainability report (marketing or material)? Ethical Investing – Influence of NGO’s - Any firm operating where social and environmental issues are at play can expect to be followed closely by a number of Non-Governmental Organisations (NGO’s or ENGOs) UN principles for Principle Investing PRI – is the set of six principles that provides a global standard for responsible investing. It relates to environmental, social and corporate governance. Organizations follow these principles to meet commitments to beneficiaries while aligning investment activities with the broader interests of society. What is the PRI? The PRI is the world’s leading proponent of responsible investment. It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. The PRI is truly independent. It encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations. Wh at is the PRI’s mission? “We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole. The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and collaboration on their implementation; by fostering good governance, integrity and accountability; and by addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation. Principle 1 We will incorporate ESG issues into investment analysis and decision-making processes.

Possible actions:  Address ESG issues in investment policy statements.  Support development of ESG-related tools, metrics, and analyses.  Assess the capabilities of internal investment managers to incorporate ESG issues.  Assess the capabilities of external investment managers to incorporate ESG issues.  Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis.  Encourage academic and other research on this theme.  Advocate ESG training for investment professionals. Principle 2 We will be active owners and incorporate ESG issues into our ownership policies and practices. Possible actions:  Develop and disclose an active ownership policy consistent with the Principles.  Exercise voting rights or monitor compliance with voting policy (if outsourced).  Develop an engagement capability (either directly or through outsourcing).  Participate in the development of policy, regulation, and standard setting (such as promoting and protecting shareholder rights).  File shareholder resolutions consistent with long-term ESG considerations.  Engage with companies on ESG issues.  Participate in collaborative engagement initiatives.  Ask investment managers to undertake and report on ESG-related engagement. Principle 3 We will seek appropriate disclosure on ESG issues by the entities in which we invest. Possible actions:  Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative).  Ask for ESG issues to be integrated within annual financial reports.  Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact).  Support shareholder initiatives and resolutions promoting ESG disclosure. Principle 4 We will promote acceptance and implementation of the Principles within the investment industry. Possible actions:  Include Principles-related requirements in requests for proposals (RFPs).

 Align investment mandates, monitoring procedures, performance indicators and incentive structures accordingly (for example, ensure investment management processes reflect long-term time horizons when appropriate).  Communicate ESG expectations to investment service providers.  Revisit relationships with service providers that fail to meet ESG expectations.  Support the development of tools for benchmarking ESG integration.  Support regulatory or policy developments that enable implementation of the Principles. Principle 5 We will work together to enhance our effectiveness in implementing the Principles. Possible actions:  Support/participate in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning.  Collectively address relevant emerging issues.  Develop or support appropriate collaborative initiatives. Principle 6 We will each report on our activities and progress towards implementing the Principles. Possible actions:  Disclose how ESG issues are integrated within investment practices.  Disclose active ownership activities (voting, engagement, and/or policy dialogue).  Disclose what is required from service providers in relation to the Principles.  Communicate with beneficiaries about ESG issues and the Principles.  Report on progress and/or achievements relating to the Principles using a comply-or-explain approach.  Seek to determine the impact of the Principles.  Make use of reporting to raise awareness among a broader group of stakeholders Discussion Questions: Do you think that pension funds have an ethical obligation regarding what they invest in? Or, Should they focus on maximising portfolio return? Ethical Investing – final note There are two styles of ‘ethical investing’ 1. The best in class approach, where you choose the best performers, even in sectors with social and environmental issues

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i.e pick the best performer in the oil and gas sector, mining sector, banking sector etc. 2. A sector based approach, where you specifically avoid or include sectors i.e avoid oil and gas sector, invest in renewable energy projects (while also have social and environmental implications) Equator Principles The Equator Principles is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in project finance. It is primarily intended to provide a minimum standard for due diligence to support responsible risk decision-making “We strongly support the new Equator Principles as a clear standard for the international financing community by which we can enhance environmental protection efforts and realize a more sustainable global economy. We embrace the Principles as one of the essential elements of our Environmental Policy, which includes monitoring the effects of our activities on the environment and working towards continuous improvement of our environmental management and pollution prevention activities The Equator Principles are intrinsic to our business approach in the area of project finance. We think of corporate responsibility as an important part of our strategy. It governs what we do - banking - with how we do it - responsibly. We can help our clients in an area of increasing activity for many of them by using the Equator Principles to help us manage social and environmental risk better. Our job is to help our clients achieve their financial goals. We believe that the Equator Principles help us do this Equator Principles The framework was designed for banks to apply social and environmental criteria to lending Summary of the Equator Principles Equator Principles (EPs) are a set of voluntary guidelines adopted by private financial institutions to ensure that large scale development or construction projects appropriately consider the associated potential impacts on the natural environment and the affected communities. Equator Principles Financial Institutions (EPFIs) formulate their own environmental and social guidelines to comply with the Equator Principles framework, which in turn confirms compliance with the underlying IFC Performance Standards and World Bank Group EHS Guidelines . EPFIs also establish internal management systems to ensure that clients implement their

projects in consideration with the environment and society. Under these management systems, EPFIs will assess the environmental and social impacts of large–scale projects and will incorporate compliance with EPs as a condition of lending. Since the inception of the Equator Principles in 2003 , the energy and extractives industry has been a major focus of the environmental and social risk reviews conducted by nearly 80 member banks. For example, Bank of Tokyo-Mitsubishi, a leader in project finance, put 225 projects through its Equator Principles review process between 2006 and 2012. Of these, 60 percent were in the mining, oil, gas and energy sectors. Focus on the energy and extractives industry by Equator Principles Financial Institutions (EPFIs) should come as no surprise. These types of projects often take place in emerging economies, where the Equator Principles are most applicable, and require major investment and external financing. Comprehensive identification, planning and management of environmental and social impacts are also essential to responsible natural resource development. With the recent launch of the third version of the Equator Principles, or EP III, some requirements have been expanded. BSR has identified five major changes for energy and extractives companies receiving funding from EPFIs: It has taken the Equator Principles (EP) just 10 years to have a positive impact on lenders and clients alike. In less than a decade, this global framework by which banks manage environmental and social risks in project financing has impacted lending procedures by financial institutions and influenced the work of corporate clients and sponsors. Equator Principles Principle One: Review and Categorisation Category A: significant potential risk Category B: limited potential risk Category C: minimal or no risk Principle Two: Environmental and Social Assessment - For all Category A and B projects on Equator Principles Financing institutions (EPFI) must require the client to perform an environmental and social assessment - To the EPFI’s satisfaction (proper due diligence) Principle Three: Applicable Environmental and Social Standards - Designated countries assessment: pertains to host countries laws, regulations and permits

- Non-designated countries: assessment pertains to International Finance Corporation and World Bank Standards Principle 4: Environmental and Social Management System and Equator Principles Action Plan - Client must develop this - Mainly to address any gaps identified in the assessment process Principle 5: Stakeholder Engagement - Key focus is on affected communities - Have they been communicated with and had their concerns addressed (in their own language) Principle 6: Grievance Mechanism “…. To receive and facilitate resolution of concerns and grievances about the project’s environmental and social performance” Principle 7: Independent Review - Must bring in outside social and environmental consultant - N.B. here is where there can be work for accounting firms Principle 8: Covenants - Many credits arrangement have financial covenants (i.e. you must maintain a particular debt to equity ratio) - A creditor to an EPFI must attach social and environmental covenants to the loan (the remedy is a little ambiguous Principle 9: Independent Monitoring and Reporting Again and opportunity to work in accounting and engineering firms Principle 10: Reporting and Transparency At a minimum must make its environmental and social assessment (from principle 2) publicly available Must also disclose GHG emissions (scope 1&2) Discussion Questions: 1. Would you care if the bank you worked for applied the equator principles? YAS 2. Do you think these have any effect in practice? YAS

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3. Are we allowing the financing arms of foreign governments and institutions to access projects that EPFIs avoid? SHOULDN’T – Again, are they having any effect? Mandatory Social and Environmental Disclosures • Much of what exists focuses more on the environmental side • However, health and safety is huge as well and often combined (i.e. asbestos) • Also relations with indigenous people, local communities, employees (including harassment) etc. When and how much reporting of any of these areas raises many ethical issues (quality of reporting varies between firms) Required Environmental Disclosure The Toxics Release Inventory (TRI) is a resource for learning about toxic chemical releases and pollution prevention activities reported by industrial and federal facilities. - All facilities releasing chemicals over given threshold must report their chemical releases to the EPA • Toxic Release Inventory (TRI) in the U.S. under the Environmental Protection Agency (EPA ) • All facilities releasing chemicals over a given threshold must report their chemical releases to the EPA • These are posted online each year The National Pollutant Release Inventory (NPRI) is Canada's legislated, publicly accessible inventory of pollutant releases (to air, water and land), disposals and transfers for recycling. It is a key resource for:  identifying pollution prevention priorities;  supporting the assessment and risk management of chemicals, and air quality modelling;  helping develop targeted regulations for reducing releases of toxic substances and air pollutants;  encouraging actions to reduce the release of pollutants into the environment; and  improving public understanding • National Pollutant Release Inventory (NPRI), Canadian version of the TRI • TRI and NPRI are required disclosures regardless of whether or not • The firm is listed on a stock exchange • The firm is private or public • Private and foreign listed companies are not subject to local securities regulation • This makes for another set of ethical situations

Us Legislation-Superfund Love Canal Disaster - Brought about RCRA and CERCLA - Resource Conservation and Recovery Act (1976) - Conservation Environmental Response, Compensation and Liability Act (1980) Quite simply, Love Canal is one of the most appalling environmental tragedies in American history. • But that's not the most disturbing fact. • What is worse is that it cannot be regarded as an isolated event. It could happen again--anywhere in this country--unless we move expeditiously to prevent it. • It is a cruel irony that Love Canal was originally meant to be a dream community. That vision belonged to the man for whom the three-block tract of land on the eastern edge of Niagara Falls, New York, was named--William T. Love. • Love felt that by digging a short canal between the upper and lower Niagara Rivers, power could be generated cheaply to fuel the industry and homes of his would-be model city. • the Love Canal site in Niagara, New York and the Valley of Drums site near Louisville, Kentucky. Both sites exemplified the worst fears of potential fallout from cheap and negligent disposal of toxic waste. America had a lot of cleaning up to do after a very lucrative period of industrialization. CERCLA The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund, was enacted by Congress on December 11, 1980. This law created a tax on the chemical and petroleum industries and provided broad Federal authority to respond directly to releases or threatened releases of hazardous substances that may endanger public health or the environment. Over five years, $1.6 billion was collected and the tax went to a trust fund for cleaning up abandoned or uncontrolled hazardous waste sites. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA):  established prohibitions and requirements concerning closed and abandoned hazardous waste sites;

 provided for liability of persons responsible for releases of hazardous waste at these sites; and  established a trust fund to provide for cleanup when no responsible party could be identified. The law authorizes two kinds of response actions:  Short-term removals, where actions may be taken to address releases or threatened releases requiring prompt response.  Long-term remedial response actions, that permanently and significantly reduce the dangers associated with releases or threats of releases of hazardous substances that are serious, but not immediately life threatening. These actions can be conducted only at sites listed on EPA's National Priorities List . CERCLA also enabled the revision of the National Contingency Plan (NCP). The NCP provided the guidelines and procedures needed to respond to releases and threatened releases of hazardous substances, pollutants, or contaminants. The NCP also established the National Prioritites List. • Superfund goes after anyone ever involved in any way for a polluted site (including banks) • Superfund liability is joint and several • EPA tends to go after deep pockets • Virtually any company that has been involved in (or has purchased a company that has been involved in) chemicals, mining, pulp and paper, oil and gas, etc. over the past 50 years, in the United States, will likely be involved in legal proceedings under the Superfund legislation • Joint and several liability, if all the students are poor and equally guilty, the money would be coming out of the prof and the students declare bankruptcy • The prof had a buddy, who bought land that was built on some oil thing, he dug out the oil thing so he would avoid any damage costs, otherwise he coulda lost 100’s of 1000’s of $ Legislation and Regulation • Securities Regulation is often driven by legislation • Sarbanes-Oxley  Raises the bar for managers  Must attest to internal controls • Dodd-Frank Act  Conflict minerals

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 Extractive Industries Transparency Initiative The Sarbanes-Oxley Act of 2002 cracks down on corporate fraud. It created the Public Company Accounting Oversight Board to oversee the accounting industry. It banned company loans to executives and gave job protection to whistleblowers. The Act strengthens the independence and financial literacy of corporate boards. It holds CEOs personally responsible for errors in accounting audits. Dodd-Frank Wall Street Reform Act. It loosened rules on banks from $50 billion to $250 billion in assets. These "small banks" include American Express, Ally Financial, and Barclays. They can no longer be considered " too big to fail ." They don't have to submit mortgage reports designed to reveal if they are following fair-lending rules. The smallest banks are already exempt. As a result, only the 10 biggest U.S. banks have to comply with Dodd-Frank. Dodd-Frank strengthened and expanded the existing whistleblower program promulgated by the Sarbanes-Oxley Act (SOX) . Specifically, the Act:  Established a mandatory bounty program under which whistleblowers can receive from 10 to 30% of the proceeds from a litigation settlement  Broadened the scope of a covered employee by including employees of the company as well as its subsidiaries and affiliates  Extended the statute of limitations under which a whistleblower can bring forward a claim against his employer from 90 to 180 days after a violation is discovered U.S. Securities

What Is Regulation S-K? Mandated by the Securities Act of 1933, Regulation S-K dictates the reporting requirements for various Securities and Exchange Commission (SEC) filings used by public companies. Regulation S-K applies to SEC Form S-1, which is the registration statement companies file with the SEC during their IPO. It also applies to the ongoing reporting requirements in documents such as Forms 10-K and 8-K. Regulation S-K also applies to annual or other reports, going-private transaction statements, tender offers, proxy statements, and any other required filings under the Securities Exchange Act of 1934. Regulation S-K works in concert with other rules and regulations that companies must comply with when filing with the SEC. U.S. Securities Rules • Early U.S. securities rules came out of U.S. legislation after the stock market crash of 1929  Regulation S-K • Required disclosure on various aspects of the firm • Over time specific disclosures have been added • Early U.S. securities rules came out of U.S. legislation after the stock market crash of 1929 • Regulation S-K • Required disclosure on various aspects of the firm • Over time specific disclosures have been added • Under Reg S-K,  potential liabilities that are material to the company’s financial condition, or that exceed, in aggregate, ten percent of total assets must be disclosed • Compliance with environmental laws and any environmental contingencies which are reasonably likely to have a material financial impact on the firm are also required disclosures

• Thus, although there may not be an accrual made for all environmental risks and liabilities, we should see it disclosed Relation to accounting • Superfund sites are on what is called the National Priority List (NPL) If the EPA decides you are or have ever been involved with a Superfund Site you can be named as Potentially Responsible Party (PRP)  Joint and several liability kicks in  EPA commonly goes after the ‘deep pockets’ At this point the auditors will generally not let you get away with keeping the liability off of the books • Thus, if these rules are followed, although environmental and social liabilities may remain off-balance sheet, any material liabilities (whether contingent or not) should be apparent from a firm’s SEC filings • Significant diversity in practise and under-reporting of environmental matters as they pertain to Reg S-K Actual Reporting • Price Waterhouse 1990 survey (now PWC)  62% of firms have known environmental liabilities that they have not disclosed • U.S. Government Accountability Office (GAO )  1993 report found that the 10% rule was not being applied properly  2004, follow-up report found things had not changed • Ontario Securities Commission  2008 report found things are the same here  Lack of reporting and a lot of ‘ boiler plate -efficiency documents’ Canadian Securities Regulations • Same issues as in the U.S. • Environmental disclosure is covered off in the continuous disclosure rules  NI 51-102 Continuous Disclosure Obligations  Also in several other National Instruments OSC Staff Notice 51-716 • Review of the environmental reporting of 35 TSX or TSX-V companies • Some firms did give good detail as to environmental risks and liabilities; however, • Many environmental reports are boiler plate and don’t give meaningful information

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– We will look at boiler-plate disclosure shortly • Mandate was given for the OSC staff to create more guidance • CSA staff notice 51-333, Environmental Reporting Guidance, Oct. 2010 OSC Staff views: • Investors are increasingly interested in detail on environmental and social matters  Particular interest in Environmental and Social Governance (ESG) CSA staff notice 51-333 • Environmental Information Required to be Disclosed • Only material information need be disclosed  Test for materiality • ‘The test for materiality is objective. Information relating to environmental matters is likely material if a reasonable investor’s decision whether or not to buy, sell or hold securities of the issuer would likely be influenced or changed if the information was omitted or misstated.’  Materiality determinations consistent with GAAP • ‘The test for materiality is objective’ (CSA Staff Notice 51-333)-fact basis • What is material to a reasonable investor? • What is a reasonable investor? • These seem to be rather subjective judgements. • CSA staff then go on to say that ‘ issuers should consider both quantitative and qualitative factors when determining materiality ’ (CSA Staff Notice 51-333, p. 7) Guidance breaks the disclosure requirements down to four basic categories 1. risks and related matters 2. risk oversight and management 3. forward-looking information (FLI) requirements, and 4. impact of adoption of International Financial Reporting Standards (IFRS) on disclosure provided under NI 51-102.  Boards should ask questions such as (risk and oversight management): • What assessment has management made of the materiality to investors of information about environmental matters ? Are disclosures made in CD documents consistent with this assessment ? • Is the material information in voluntary reports also disclosed on a timely basis in securities regulatory filings? • How has management ensured that information reported on corporate websites or in voluntary reports is consistent with that provided in their CD documents? • Does any Forward Looking Information (FLI) in the voluntary reports comply with FLI requirements under securities legislation? CSA staff notice 51-333: Voluntary Reporting • Users complain of lack in consistency and timeliness of voluntary reporting

• Some voluntary reporting should actually be in the required continuous disclosure documents • Regardless, there are governance issues • Board and Management will be responsible for any misstatements • Users complain of lack in consistency and timeliness of voluntary reporting • Some voluntary reporting should actually be in the required continuous disclosure documents • Regardless, there are governance issues • Board and Management will be responsible for any misstatements Lecture 2: Boiler Plate Disclosures - These are very basic, non-detailed, general descriptions of risks and related matters - Non-boiler plate disclosures - Boilerplate is a term that refers to a standardized document, method or procedure. - boilerplates are frequently used where a form or document can be reused in a new context without substantial changes to the text. For example, a bank may use a standard contract for everyone who applies for a home loan. Bank employees and loan applicants fill in blanks or select from lists of checkboxes, depending on the circumstances, rather than create an entirely new document that addresses every detail of the situation. Typically, boilerplates remain unchanged so the parties who use them are not easily misled into agreeing to undesirable things that even small changes in the boilerplate's text could indicate Issuers are reminded that their disclosure should be tailored to their particular circumstances and that their CD documents must comply with all applicable disclosure requirements The examples of entity-specific disclosure are set out under the ff. headings:  Environmental risks  Trends and uncertainties  Environmental liabilities  Asset retirement obligations  Financial and operational effects of environmental protection requirements  Environmental policies fundamental to operations and  Board mandate and committee And many resort to "boilerplate" disclosures where the information they provide is almost meaningless and, in certain cases, even seems to parrot the words of competitors.

NEW YORK, NY, January 21, 2016 – Corporate risks disclosed by public companies in Securities and Exchange Commission (SEC) filings often are generic and do not provide investors with clear, concise and insightful information that is company-specific. A new analysis of risk factor disclosures in annual reports finds that they typically are vague, repetitive and “boilerplate,” offering investors little actionable insight into the risks facing companies. “The reason for required risk factor disclosures is to inform investors and others of the risks faced by individual companies. Instead, we see corporate disclosures that read like a laundry list of generic risks couched in legalese and lacking meaningful specificity. This is not helpful for investors trying to understand corporate risks, and it certainly does not enable investors to distinguish between the relative risk profile of different companies or the relative importance of the risks on the laundry list,” 1. Competition, global market factors and regulatory matters are the most common risks cited by all companies but are often discussed generically. This suggests an opportunity for companies to reconsider existing generic discussions. 2. Disclosures generally are lengthy, and companies with a lower risk profile in particular have opportunities to reduce the extent and number of generic risk factors disclosed. 3. When companies do use specific language to discuss risk mitigation efforts and/or changes in the nature of the risk, those disclosures tend to be minimal (e.g., a couple of words or a sentence) and are overshadowed by the prevalent use of vague, boilerplate language throughout the risk factor disclosures. 4. The disclosures may serve as an indicator of what a broad base of companies view as emerging risks. Attention to non-traditional risks such as cybersecurity and climate change is evident from the review. Cybersecurity is one area where companies have responded to recent concerns expressed by investors and policymakers with disclosure that discusses the extent, effects and management of cyber risks. A common criticism of risk reporting is that too much of it is boilerplate, but if you’re preparing a risk report it’s often diffi cult to avoid. Similar businesses face similar risks and so they naturally describe them in similar terms. Regulators in the UK and the US are both trying to crack down on generic disclosures and to push businesses towards disclosing information on risk that is specifi c to the business. This is a worthwhile objective, but it will often be one that is impossible to achieve. For example, before the Deepwater Horizon incident, BP disclosed in general terms the risks of such an event and its possible consequences. But any other major oil company could probably have written the same. The company-specifi c impacts of such an event depend on what exactly happens and where and when and how precisely it affects people and the environment. All of this varies hugely from incident to incident and is not predictable. Even where companies could in theory disclose more

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specifi c information about risks, there are often cogent reasons why they should not. Companies compete on their ability to assess and manage their risks. If they disclose specifi c information about either aspect, they are in effect making a gift to their competitors. Often they get around this problem by making ineffective disclosures. A typical disclosure of this sort is a listing of all the committees involved in conducting or overseeing the company’s risk management and a description of their inter-relationships. Such information is certainly company specifi c. But – in my view – nothing could be more uninformative. subjective, cannot foretell future events, and often cannot be very specific without damaging the business. But it can be improved. The good news is that if companies follow our seven principles they will produce better risk reporting – and should help to make future financial crises a bit less likely Voluntary Reporting - Need to define quantitative vs. qualitative disclosure - More quantitative non-boiler plate disclosures ae considered useful and of higher quality The GRI Standards represent global best practice for reporting publicly on a range of economic, environmental and social impacts. Sustainability reporting based on the Standards provides information about an organization’s positive or negative contributions to sustainable development. The modular, interrelated GRI Standards are designed primarily to be used as a set, to prepare a sustainability report focused on material topics. The three universal Standards are used by every organization that prepares a sustainability report. An organization also chooses from the topic-specific Standards to report on its material topics – economic, environmental or social. Preparing a report in accordance with the GRI Standards provides an inclusive picture of an organization’s material topics, their related impacts, and how they are managed. An organization can also use all or part of selected GRI Standards to report specific information. • The GRI is the largest and best known set of environmental and social governance (ESG) standards in the World • Can argue that it is more focused on form than substance • Thus, can be used as a legitimising tool

GRI allows management to: Define materiality Identify key stakeholders (not pre-determined) • Management gets to specify who the organization considers to be its key stakeholders and to whom they feel accountable • However, should follow the Principle: The organization should identify its stakeholders, and explain how it has responded to their reasonable expectations and interests • Firms Choose to be: • ‘In accordance’ - core, or • ‘In accordance’ – comprehensive • Replaces the old A(+),B, C system of G3 • Core • Have more limited reporting requirements • Comprehensive • Must disclose all general standard disclosures plus all ‘material’ aspects of 200-400 Series disclosures • Also sets of industry specific standard disclosures that must be reported if material (in both cases) • GRI 101: Foundation is the starting point for an organization to use the GRI Standards to report about its economic, environmental, and/or social impacts. • The GRI Standards create a common language for organizations and stakeholders, with which the economic, environmental, and social impacts of organizations can be communicated and understood. They have been designed to enhance the global comparability and quality of information on these impacts, thereby enabling greater transparency and accountability of organizations.

• GRI 101: Foundation applies to any organization that wants to use the GRI Standards to report about its economic, environmental, and/or social impacts . Therefore, this Standard is applicable to: • an organization that intends to prepare a sustainability report in accordance with the GRI Standards; or • an organization that intends to use selected GRI Standards, or parts of their content, to report on impacts related to specific economic, social, and/or environmental topics (e.g., to report on emissions only). GRI 101 can be used by an organization of any size, type, sector, or geographic location. n 1987, the World Commission on Environment and Development set out an aspirational goal of sustainable development – describing it as ‘development which meets the needs of the present without compromising the ability of future generations to meet their own needs.’1 Sustainability reporting, as promoted by the GRI Standards, is an organization’s practice of reporting publicly on its economic, environmental, and/or social impacts, and hence its contributions – positive or negative – towards the goal of sustainable development. GRI 101: Foundation is the starting point for using the set of GRI Standards. GRI 101 sets out the Reporting Principles for defining report content and quality. It includes requirements for preparing a sustainability report in accordance with the GRI Standards, and describes how the GRI Standards can be used and referenced. GRI 101 also includes the specific claims that are required for organizations preparing a sustainability report in accordance with the Standards, and for those using selected GRI Standards to report specific information. GRI 102: General Disclosures 2016 sets out reporting requirements on contextual information about an organization and its sustainability reporting practices. This Standard can be used by an organization of any size, type, sector or geographic location. GRI 102: General Disclosures is used to report contextual information about an organization and its sustainability reporting practices. This includes information about an organization’s profile, strategy, ethics and integrity, governance, stakeholder engagement practices, and reporting process.

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The disclosures in GRI 102 provide the context for subsequent, more detailed reporting using other GRI Standards. Contextual information about an organization (for example, about its size, geographic location, or activities) is important to help stakeholders understand the nature of the organization and its economic, environmental and social impacts. • GRI 102: General Disclosures sets out reporting requirements on contextual information about an organization and its sustainability reporting practices. This Standard can be used by an organization of any size, type, sector or geographic location. GRI 102: General Disclosures is used to report contextual information about an organization and its sustainability reporting practices. • This includes information about an organization’s profile, strategy, ethics and integrity, governance, stakeholder engagement practices, and reporting process. GRI 102-12 The reporting organization shall report the following information: a. A list of externally-developed economic, environmental and social charters, principles, or other initiatives to which the organization subscribes, or which it endorses. When compiling the information specified in Disclosure 102-12, the reporting organization should: 1.4.1 include the date of adoption, the countries or operations where applied, and the range of stakeholders involved in the development and governance of these initiatives; 1.4.2 differentiate between non-binding, voluntary initiatives and those with which the organization has an obligation to comply. GRI 102-16 a decription of the organizations values, principles,standards and norms of behaviour 3.1 When compiling the information specified in Disclosure 102-16, the reporting organization should provide additional information about its values, principles, standards, and norms of behavior, including: 3.1.1 how they were developed and approved; 3.1.2 whether training on them is given regularly to all and new governance body members, workers performing the organization’s activities, and business partners; 3.1.3 whether they need to be read and signed regularly by all and new governance body members, workers performing the organization’s activities, and business partners; 3.1.4 whether any executive-level positions maintain responsibility for them; 3.1.5 whether they are available in different languages to reach all

governance body members, workers performing the organization’s activities, business partners, and other stakeholders 102-17 The reporting organization shall report the following information: a. A description of internal and external mechanisms for: i. seeking advice about ethical and lawful behavior, and organizational integrity; ii. reporting concerns about unethical or unlawful behavior, and organizational integrity. Guidance Examples of elements that can be described include: • Who is assigned the overall responsibility for the mechanisms to seek advice about and report on behavior; • Whether any mechanisms are independent of the organization; • Whether and how workers performing the organization’s activities, business partners, and other stakeholders are informed of the mechanisms; • Whether training on them is given to workers performing the organization’s activities and business partners; • The availability and accessibility of the mechanisms to workers performing the organization’s activities and business partners, such as the total number of hours per day, days per week, and availability in different languages; • Whether requests for advice and concerns are treated confidentially; • Whether the mechanisms can be used anonymously; • The total number of requests for advice received, their type, and the percentage that were answered during the reporting period; • The total number of concerns reported, the type of misconduct reported, and the percentage of concerns that were addressed, resolved, or found to be unsubstantiated during the reporting period; • Whether the organization has a non-retaliation policy; • The process through which concerns are investigated; • The level of satisfaction of those who used the mechanisms. • GRI 103: Management Approach sets out reporting requirements about the approach an organization uses to manage a material topic. This Standard can be used by an organization of any size, type, sector or geographic location. • GRI 103: Management Approach 2016 sets out reporting requirements about the approach an organization uses to manage a material topic. This Standard can be used by an organization of any size, type, sector or geographic location . • Management approach disclosures enable an organization to explain how it manages the economic, environmental and social impacts related to material topics. This provides narrative information about how the organization identifies, analyzes, and responds to its actual and potential impacts. • Disclosure about an organization’s management approach also provides context for the information reported using topic-specific Standards (series 200, 300 and 400). This can be especially useful for explaining quantitative information to stakeholders.

• The reporting requirements in this Standard have a generic form, and can be applied to a wide variety of topics. An organization preparing a report in accordance with the GRI Standards is required to report its management approach for each material topic using this Standard. Topic-specific Standards can also contain additional reporting requirements, reporting recommendations and/or guidance for reporting management approach information about the topic in question. GR1 103-1 • For each material topic, the reporting organization shall report the following information: a. An explanation of why the topic is material. b. The Boundary for the material topic, which includes a description of: i. where the impacts occur; ii. the organization’s involvement with the impacts. For example, whether the organization has caused or contributed to the impacts, or is directly linked to the impacts through its business relationships. c. Any specific limitation regarding the topic Boundary. GR1 103-2 For each material topic, the reporting organization shall report the following information: a. An explanation of how the organization manages the topic. b. A statement of the purpose of the management approach. c. A description of the following, if the management approach includes that component: i. Policies ii. Commitments iii. Goals and targets iv. Responsibilities v. Resources vi. Grievance mechanisms vii. Specific actions, such as processes, projects, programs and initiatives GR1 103-3 For each material topic, the reporting organization shall report the following information: a. An explanation of how the organization evaluates the management approach, including: i. the mechanisms for evaluating the effectiveness of the management approach; ii. the results of the evaluation of the management approach; iii. any related adjustments to the management approach. Second main type of disclosure found in following series: • Economic • See GRI 201 Economic Performance • This Standard includes disclosures on the management approach and topic-specific disclosures. These are set out in the Standard as follows: • Management approach disclosures (this section references GRI 103) • Disclosure 201-1 Direct economic value generated and distributed • Disclosure 201-2 Financial implications and other risks and opportunities due to climate change • Disclosure 201-3 Defined benefit plan obligations and other retirement plans • Disclosure 201-4 Financial assistance received from government

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• See GRI 205 Anti-Corruption • This Standard includes disclosures on the management approach and topic-specific disclosures. These are set out in the Standard as follows: • Management approach disclosures (this section references GRI 103) • Disclosure 205-1 Operations assessed for risks related to corruption • Disclosure 205-2 Communication and training about anti- corruption policies and procedures • Disclosure 205-3 Confirmed incidents of corruption and actions taken In the context of this GRI Standard, the term ‘business partners’ includes, among others, suppliers, agents, lobbyists and other intermediaries, joint venture and consortia partners, governments, customers, and clients. • Environmental • See GRI 305 Emissions This Standard includes disclosures on the management approach and topic-specific disclosures. These are set out in the Standard as follows: • Management approach disclosures (this section references GRI 103) • Disclosure 305-1 Direct (Scope 1) GHG emissions • Disclosure 305-2 Energy indirect (Scope 2) GHG emissions • Disclosure 305-3 Other indirect (Scope 3) GHG emissions • Disclosure 305-4 GHG emissions intensity • Disclosure 305-5 Reduction of GHG emissions • Disclosure 305-6 Emissions of ozone-depleting substances (ODS) • Disclosure 305-7 Nitrogen oxides (NOX), sulfur oxides (SOX), and other significant air emissions • Social • See GRI 401 Employment This Standard includes disclosures on the management approach and topic-specific disclosures. These are set out in the Standard as follows: • Management approach disclosures (this section references GRI 103) • Disclosure 401-1 New employee hires and employee turnover • Disclosure 401-2 Benefits provided to full-time employees that are not provided to temporary or part-time employees • Disclosure 401-3 Parental leave • See GRI 414 Supplier Social Assessment • This Standard includes disclosures on the management approach and topic-specific disclosures. These are set out in the Standard as follows: • Management approach disclosures (this section references GRI 103) • Disclosure 414-1 New suppliers that were screened using social criteria • Disclosure 414-2 Negative social impacts in the supply chain and actions taken Integrated reporting (IR) in corporate communication is a "process that results in communication, most visibly a periodic “integrated report”, about value creation over time. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term It means the integrated representation of a company’s performance in terms of both financial and other value relevant information. Integrated Reporting provides greater context for performance data,

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clarifies how value relevant information fits into operations or a business, and may help make company decision making more long-term. While the communications that result from IR will be of benefit to a range of stakeholders, they are principally aimed at providers of financial capital allocation decisions. We compared the three dominant EESG reporting frameworks: the Global Reporting Initiative ( GRI ), the International Integrated Reporting Council IR Framework, and the Sustainability Accounting Standards Board guidelines ( SASB ). Each of these frameworks adopts a different definition of materiality, or the principle determining which issues are considered relevant in influencing decision-makers. The GRI G4 indicates that “the report should cover Aspects that 1. reflect the organization’s significant economic, environmental, and social impacts; or 2. substantively influence the assessments and decisions of stakeholders”. The SASB Implementation Guide does not define materiality, but instead refers to the definition set out by the US Supreme Court: “A substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.” Finally, the IIRC states that “an integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term.” Each emphasizes different elements of the broad ESG universe. While GRI G4 builds its materiality around a multi-stakeholder approach, SASB focuses on investor-centric material ESG information. <IR> materiality relies on value creation across six different 'capitals': financial, manufactured, social and relationship, intellectual, human and natural. The SASB aims to meet the need for industry-specific reporting standards, to ease comparison and benchmarking . [1] [4] In order to do so, a Sustainable Industry Classification System covering ten sectors and 80+ industries has been devised. From Q4 2012, industry-specific working groups are to convene to pursue the goal of completing the standards within two and a half years. [5] [6] Key performance indicators will then be updated annually. [1] [7] There is recognition that establishing what is material in information that is fundamentally non-financial is complex. [4] [8] SASB • Founded by Michael Bloomberg • From the SASB ( https://www.sasb.org/ ): “The Standards are designed to guide the disclosure of material sustainability information in standard SEC filings, such as the Form 10-K and 20-F.” • So 100 percent U.S. focused. Effectively, they are providing standards that cover off what we have looked at under Reg S-K. • We saw similar direction in CSA Staff Notice 51-333 About SASB (from the SASB)

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• The Sustainability Accounting Standards Board (SASB) provides sustainability accounting standards for use by publicly-listed corporations in the U.S. in disclosing material sustainability information for the benefit of investors and the public. • SASB is an independent 501(c)3 non-profit organization. • SASB has developed standards for more than 80 industries in 10 sectors. From SASB, Sustainability disclosure topics: • Environment • Social Capital • Human Capital • Leadership and Governance • This is similar to the GRI and 51-333 • Again, tied to Reg S-K • But the SASB makes a big pitch for value Benefits of adoption include: • Companies: Comply with existing U.S. Federal Law (Regulation S-K) and measure and manage the sustainability risks and opportunities most likely to impact value • Lawyers: Help companies understand the liability implications of sustainability information • Investors: Identify risks/opportunities in your portfolio and benchmark companies in a given industry Accountants: Help focus internal management and enhance external reporting on the sustainability topics most likely to impact value” Big Push on Value Impact • From SASB Metals and Mining Research Brief • ``Companies that cost-effectively reduce GHG emissions from their operations by implementing industry-leading technologies and processes can create operational efficiency. • They can mitigate the impact of increased fuel costs and regulations that limit – or put a put a price on – carbon emissions, in an environment of increasing regulatory and public concerns about climate change, in the U.S. and globally.`` • This is pretty ambiguous (boiler plate) Value Impact (from SASB Metals and Mining Industry Brief): ``The following section provides a brief description of each sustainability issue that is likely to have material implications for companies in the Metals & Mining industry. This includes an explanation of how the issue could impact valuation and evidence of actual financial impact.`` • It is extremely similar to the usual triple bottom-line, GRI approach • However: it is meant to apply to the required 10-K disclosure, not voluntary disclosure. Conflict Minerals – EU Regulation The new rule requires four types of supply chain due diligence obligations:

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1. Management system obligations, that is, to adopt supply chain standards in line with Annex II of the Organization for Economic Cooperation and Development’s (OECD) Due Diligence Guidance; 2. Risk management obligations, that is, to identify, assess, and report risks of adverse impact in own supply chain; 3. Third party obligations, that is, to commission third party audits of activities, processes, and systems; 4. Disclosure obligations, that is, to make the results of third party audits publicly available, disclose information gathered as a result of due diligence activities to downstream purchasers, and on a yearly basis report on supply chain due diligence policies and practices. Friedman Vs. Narver Milton Friedman takes a shareholder approach to social responsibility. This approach views shareholders as the economic engine of the organization and the only group to which the firm must be socially responsible. As such, the goal of the firm is to maximize profits and return a portion of those profits to shareholders as a reward for the risk they took in investing in the firm. He advocates that the shareholders can then decide for themselves what social initiatives to take part in rather than having their appointed executive, whom they appointed for business reasons, decide for them. Friedman argued that a company should have no " social responsibility " to the public or society because its only concern is to increase profits for itself and for its shareholders and that the shareholders in their private capacity are the ones with the social responsibility. He wrote about this concept in his book Capitalism and Freedom . In it he states that when companies concern themselves with the community rather than focusing on profits, it leads to totalitarianism . [1] [2] In the book, Friedman writes: "There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." [3] The idea of the stockholder theory, some argue [ who? ] , is inconsistent with the idea of corporate social responsibility at the cost of the stakeholder . [4] For example, a company donating services or goods to help those hurt in a natural disaster, in some ways, may be considered not taking action in the best interest of the shareholder. Instead Friedman argues that shareholders should themselves decide how much and to whom they would like to make donations. Some may argue that goods provided to society in a time of need build further allegiance to a corporation and in theory, meet the stockholder theory's requirement to look in the best interest of the stockholder. Narver: We agree with Friedman that the overall goal of the firm is to maximize profits or more, correctly to maximize the present value of the firm. But, we add that today, voluntarily actions regarding external effects are essential for such wealth maximization. Having stated the argument in brief, we acknowledge as Friedman implies, that probably the ideal solution to external effects or other social problems is enactment of socially just and economically sound legislation which would have the merit of leaving little or nothing to the judgment and timing of businesses in regard to correcting the problems

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Consider Externalities. The external effects may either cost or benefits. An External diseconomy means that because of someone else’s actions, one’s cost are higher, polluted water for a fish hatchery which requires pure water. An external economy on the other hand, is one in which ther are reduced costs of operation due to an outside source such as more highly skilled labor of a type required by a firm coming into market, The basic nature of an external effects is that actions of individuals have effects on other individuals, for which it is usually not feasible to charge or recompense them. Why should a profit maximizing firm voluntarily assume some amount of the extra costs? Precisely how can the profit maximizing firm assume these costs but yet not commit suicide in the marketplace? With respect to the first question, it is only by such behaviour (which can be of various sorts) that a firm can best

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Insider trading is the trading of a public company 's stock or other securities (such as bonds or stock options ) by individuals with access to nonpublic information about the company. In various countries, some kinds of trading based on insider information is illegal. This is because it is seen as unfair to other investors who do not have access to the information, as the investor with insider information could potentially make larger profits than a typical investor could make. Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not in the public domain . Many jurisdictions require that such trading be reported so that the transactions can be monitored. In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. In these cases, insiders in the United States are required to file a Form 4 with the U.S. Securities and Exchange Commission (SEC) when buying or selling shares of their own companies.

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ALBERTA SECURITIES ACT Section 92(4.1) • No person or company shall make a statement that the person or company knows or reasonably ought to know • (a) in any material respect and at the time and in the light of the circumstances in which it is made, • (i) is misleading or untrue, or • (ii) does not state a fact that is required to be stated or that it is necessary to make the statement not misleading • and • (b) would reasonably be expected to have a significant effect on the market price or value of a security or exchange contract. • Similar provisions in the Securities Acts of other provinces NI 51-102 Continuous Disclosure Obligations In accordance with National Instrument 51-102 Continuous Disclosure Obligations, high- quality financial reporting is required from companies that are reporting issuers in Nova Scotia. The NSSC conducts regular reviews of financial statements which is separate from its review of offering documents. The aimed is to review information that companies provide on an ongoing basis. The NSSC conducts reviews of current disclosure documents including:  Filing of financial statements  Management discussion and analysis  Annual information forms  Business acquisition reports  Material change reports, proxy solicitation and information circulars Governs the required disclosure by reporting issuers Requires • Financial Statements (Annual, Quarterly) • F1 Management Discussion and Analysis (MD&A) • F2 Annual Information Forms: • I.e. Annual Oil and Gas Disclosure (NI 51-101) • F3 Material Change Report • F4 Business Acquisition Report

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• F5 Information Circular • F6 Executive Compensation SEDAR is the System for Electronic Document Analysis and Retrieval, the electronic filing system for the disclosure documents of public companies and investment funds across Canada. All Canadian public companies and investment funds are generally required to file their documents in the SEDAR system. In addition, some third parties who are involved in public company transactions such as take-over bids or proxy contests may be required to file. Marketwired, an authorized SEDAR filing agent, will handle all details of your SEDAR filing:  Convert your documents into required SEDAR formats  Send you a proof of the filing for your approval  Make any required changes and file your document with SEDAR  Provide confirmation that your document was accepted  Provide you with information on filing fees, deadlines, document formatting, etc. as requested United Nations Sustainable Development Goals • Came out of the highly successful Millennium Development Goals • In 2015 World Leaders agreed to 17 goals to be worked toward from 2016-2030 • Almost all efforts at the UN these days work towards the SDGs, or need to be seen in the context of the SDGs • However, SDGs are nationally driven since the UN has no real power • it is at the mercy of its donor nations The Sustainable Development Goals are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate, environmental degradation, prosperity, and peace and justice. The Goals interconnect and in order to leave no one behind, it ís important that we achieve each Goal and target by 2030.

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Lots of management accounting type performance measurement • 17 goals • 69 underlying targets • Over 300 indicators • Annual progress report from the Secretary General • Each participating country will have its own performance measurements as well Agency theory and stakeholder theory are both used to understand and explain various types of relationships in business. Both theories provide a means to understand business challenges. Problems may be a result of genuine misinformation or may actually be caused by clashing business interests. These theories are often used to outline the interests of shareholders , employees, customers, the public and vendors . Many challenges that manifest within the business world as a result of incomplete information, miscommunication and conflict may be explained using these two theories. Agency Theory Agency theory describes the problems that occur when one party represents another in business but holds different views on key business issues or different interests from the principal. The agent, acting on behalf of another party, may disagree about the best course of action and allow personal beliefs to influence the outcome of a transaction. The agent may also choose to act in self-interest instead of the principal's interests. This may result in conflict between the two parties and may be an agency problem .

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Stakeholder Theory Stakeholder theory describes the composition of organizations as a collection of various individual groups with different interests. These interests, taken together, represent the will of the organization. As much as possible, business decisions should consider the interests of this collective group and advance overall cooperation. Conflict represents an erosion of these interests. Bringing these distinct groups together to reach agreement may not always be possible, so business decisions must consider each point of view and optimize the decision making to include all voices. The manager’s role in stewardship theory is to maximize the potential of the firm and to pursue long-term wealth acquisition with organizational and individual desires best accomplished by assessing collective ends. The goal is on assuming accountability and responsibility for the organizational community. The model of a manager should be as a steward whose behavior is ordered and organizational; whose collectivistic behavior is of higher reverence than individualistic, self-serving conduct. They exemplify that man being intelligent makes rational, not irrational decisions, unlike agency proposers who dispute stewardship. Stewardship theory view employees as assets of the firm as the agency did but they differ in their treatment of the human nature’s motivation and ability of control. A true steward is driven by his need of self-actualization, growth and achievement without being opportunistic and self-interested in his performance. Difference Between Agency Theory and Stewardship Theory Agency theory concentrates primarily on the association between the principal and the agents in corporations, having a formal and contractual nature of relationship however with the presumed goal indifference and incongruence of interest. Meanwhile, Stewardship theory is involved mainly in analyzing the importance of the co-existence of trust-based relationships along with agency relations in firms. The stewardship approach, which encompasses commitment and trust to shared goals and desires exhibited by the principal and the manager alike, aligns the interest of the two parties. There are two key points that differentiated the Agency Theory and Stewardship Theory. These are the motivation and power comparison. In an agency type, the manager is motivated by personal interests and extrinsic rewards. In the stewardship, the manager is motivated by the human need for intellectual growth, achievement, and self- actualization, and by intrinsic rewards. In an agency theory, the power is institutionally directed while in the stewardship, it is based on personal ability and power to run the particular organization. Agency Theory and Stewardship Theory are not mutually exclusive but create a link between agency and stewardship relationships. Clearly, the stewardship theory provided a room for the failures and gaps in the agency theory. A manager of a firm may choose what type of inclination he is up to particularly in decision making as long as these three assumptions are supplemented. First the decision must be mutually agreed upon by both the principal and the agent. Secondly, it will always depend on the situation, and third objective is the expectations of the parties involved.

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volkswagen's emissions cheating scandal, for which Audi chief executive Rupert Stadler was arrested on Monday, has had repercussions for the car industry around the world. Here's what you need to know about "dieselgate". How the scandal started On September 18, 2015, the US Environmental Protection Agency (EPA) reported that VW had installed illegal so-called defeat devices in hundreds of thousands of 2.0-litre engines in the United States since 2009. The software—used in the Volkswagen, Porsche, Audi, Seat and Skoda brands—helped make the cars meet exhaust pollution standards when monitored in tests but in real life their emissions exceeded the limits. Four days later the company admitted that some 11 million diesel vehicles worldwide, including 8.5 million in Europe, and 600,000 in the United States, had been fitted with the software. Investigators found that some cars spewed out up to 40 times more harmful nitrogen oxide—linked to respiratory and cardiovascular diseases—than legally allowed. As recently as May this year, Germany ordered Porsche to recall 60,000 vehicles across Europe after they were found to have been equipped with so-called "defeat devices". A month later, Audi was ordered to recall 60,000 cars for the same reason. On July 21, 2015, Toshiba (OTCBB:TOSBF) CEO Hisao Tanaka announced his resignation in the face of an accounting scandal tied to about $1.2 billion in overstated operating profits . Details of the scandal emerged the day before when an independent investigative panel released a report describing the accounting improprieties in detail. Improper accounting was found to have taken place over the course of seven years, embroiling two former CEOs in the scandal alongside Tanaka. The investigative report revealed that the CEOs did not directly instruct anyone to cook the books but rather placed immense pressure on subordinates and waited for the corporate culture to turn out the results they wanted. It may feel like longer to some, but it was just a decade ago that a catastrophic housing crisis destroyed the lives of many Americans, with effects that still exist today. As we approach the 10-year anniversary of Lehman Brothers' collapse and the Great Recession , we should take a look back at the subprime mortgage crisis. How did it start and who was to blame? What happened, and what is still happening in the wake of it? And what even makes a mortgage subprime? What Is a Subprime Mortgage? Subprime mortgages are named for the borrowers that the mortgages are given to. If the prime rate for a mortgage is what is offered to people with good credit and a history of dependability, subprime is for those who have struggled to meet those standards.

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People who are approved of subprime mortgages historically have low credit scores and problems with debt. There is no exact established number, but a FICO score below 640 is generally seen as subprime for a loan like a mortgage. People with spotty credit histories like this often have tremendous difficulty getting approval on a mortgage, and as such the monthly payments have much higher interest rates than normal since the lenders view the loan as much riskier. How Did the Subprime Mortgage Crisis Start? How did the U.S. economy get to a point where in 2007, a full-on housing crisis began? It doesn't happen overnight. In the early-to-mid 2000s, interest rates on house payments were actually quite low. In what looked to be a solid economy after a brief early 2000s recession, more and more people with struggling credit were able to qualify for subprime mortgages with manageable rates, and happily acted on that. This sudden increase in subprime mortgages was due in part to the Federal Reserve's decision to significantly lower the Federal funds rate to spur growth. People who couldn't afford homes or get approved for loans were suddenly qualifying for subprime loans and choosing to buy, and American home ownership rose exponentially. Real estate purchases rose not only for subprime borrowers, but for well-off Americans as well. As prices rose and people expected a continuation of that, investors who got burned by the dot com bubble of the early 2000s and needed a replacement in their portfolio started investing in real estate.

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Housing prices were rising rapidly, and the number of subprime mortgages given out was rising even more. By 2005, some began to fear that this was a housing bubble. From 2004-2006, the Federal Reserve raised the interest rate over a dozen times in an attempt to slow this down and avoid serious inflation. By the end of 2004, the interest rate was 2.25%; by mid-2006 it was 5.25%. This was unable to stop the inevitable. The bubble burst. 2005 and 2006 see the housing market crash back down to earth. Subprime mortgage lenders begin laying thousands of employees off, if not filing for bankruptcy or shutting down entirely. What Parties Were to Blame for the Crisis? The subprime mortgage crisis, which guided us into the Great Recession, has many parties that can share blame for it. For one, lenders were selling these as mortgage-backed securities. After the lenders approved and gave out the loan, that loan would be sold to an investment bank. The investment bank would then bundle this mortgage with other similar mortgage for other parties to invest in, and the lender would, as a result of the sale, have more money to use for home loans. It is a process that had worked in the past, but the housing bubble saw an unusually large number of subprime mortgages approved for people who struggled with credit and income. When the Fed began raising interest rates over and over, those loans became more expensive and the borrowers found themselves unable to pay it off. Lenders were far too ready to give away so many risky loans at once, seemingly assuming that housing prices would continue to rise and interest

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rates would stay low. Investment banks seem to have had similar motives, getting bolder with their mortgage-backed securities investments. Though these parties decidedly took advantage of people with bad credit in need of a place to live, homebuyers and the distinctly American pursuit of owning a home played a small role in this as well. The dream of upward mobility and owning larger homes led people to be riskier with their own real estate investments, and predatory lenders were all too ready to help them. Effects of the Mortgage Crisis Home prices fell tremendously as the housing bubble completely burst. This crushed many recent homeowners, who were seeing interest rates on their mortgage rise rapidly as the value of the home deteriorated. Unable to pay their mortgage on a monthly payment and unable to sell the home without taking a massive loss, many had no choice. The banks foreclosed on their houses. Homeowners were left in ruins, and many suburbs turned into ghost towns. Even homeowners with good credit who qualified for standard mortgages struggled with the steadily rising interest rates. By the time these homes were foreclosed upon, they had cratered in value. That meant banks were also taking massive losses on real estate. Investors got hit hard as well, as the value of the mortgage-backed securities they were investing in tumbled. This was made more difficult due to people still buying homes even as the bubble began to burst in 2006 into early 2007. Loans were still being given out and taken as sales slumped. Investment banks who bought and sold these loans that were being defaulted on started failing. Lenders no longer had the money to continue giving them out. By 2008, the economy was in complete freefall.

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Some institutions got bailed out by the government. Other banks, who had gotten so involved in the mortgage business, were not so lucky. Subprime Mortgage Crisis and Lehman Brothers Lehman Brothers was one of the largest investment banks in the world for years. It was also one of the first investment banks to get very involved with investing in mortgages, something that would pay off until it became their downfall. The plummeting price of real estate and the widespread defaulting on mortgages crushed Lehman Brothers. They were forced to close their subprime lenders, and despite their many attempts to stop the bleeding (such as issuing stock) they continued to take on losses until, on Sept. 15, 2008, Lehman Brothers applied for bankruptcy. A Ponzi scheme (/ˈpɒnzi/; also a Ponzi game) is a form of fraud which lures investors and pays profits to earlier investors by using funds obtained from more recent investors. Ponzi Scheme What is a 'Ponzi Scheme' A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers. For both Ponzi schemes and pyramid schemes, eventually there isn't enough money to go around, and the schemes unravel. BREAKING DOWN 'Ponzi Scheme'

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A Ponzi scheme is an investment fraud where clients are promised a large profit at little to no risk. Companies that engage in a Ponzi scheme focus all of their energy into attracting new clients to make investments. This new income is used to pay original investors their returns, marked as a profit from a legitimate transaction. Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors. When this flow runs out, the scheme falls apart. Origins of the Ponzi Scheme The first notorious Ponzi scheme was orchestrated by a man named Charles Ponzi in 1919. The postal service, at that time, had developed international reply coupons that allowed a sender to pre-purchase postage and include it in their correspondence. The receiver would take the coupon to a local post office and exchange it for the priority airmail postage stamps needed to send a reply. With the constant fluctuation of postage prices, it was common for stamps to be more expensive in one country than another. Ponzi hired agents to purchase cheap international reply coupons in other countries and send them to him. He would then exchange those coupons for stamps that were more expensive than the coupon was originally purchased for. The stamps were then sold as a profit. This type of exchange is known as an arbitrage , which is not an illegal practice. Ponzi became greedy and expanded his efforts. Under the heading of his company, Securities Exchange Company, he promised returns of 50% in 45 days or 100% in 90 days. Due to his success in the postage stamp scheme, investors were immediately attracted. Instead of actually investing the money, Ponzi just redistributed it and told the investors they made a profit. The scheme lasted until 1920, when an investigation into the Securities Exchange Company was conducted. Ponzi Scheme Red Flags The concept of the Ponzi scheme did not end in 1920. As technology changed, so did the Ponzi scheme. In 2008, Bernard Madoff was convicted of running a Ponzi scheme that falsified trading reports to show a client was earning a profit.

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Regardless of the technology used in the Ponzi scheme, most share similar characteristics: 1. A guaranteed promise of high returns with little risk 2. Consistent flow of returns regardless of market conditions 3. Investments that have not been registered with the Securities and Exchange Commission (SEC) 4. Investment strategies that are a secret or described as too complex 5. Clients not allowed to view official paperwork for their investment 6. Clients facing difficulties removing their money A well-respected financier, Madoff convinced thousands of investors to hand over their savings, falsely promising consistent profits in return. He was caught in December 2008 and charged with 11 counts of fraud, money laundering, perjury, and theft. Madoff used a so-called Ponzi scheme, which lures investors in by guaranteeing unusually high returns. The name originated with Charles Ponzi, who promised 50% returns on investments in only 90 days. Ponzi schemes are run by a central operator, who uses the money from new, incoming investors to pay off the promised returns to older ones. This makes the operation seem profitable and legitimate, even though no actual profit is being made. Meanwhile, the person behind the scheme pockets the extra money or uses it to expand the operation. To avoid having too many investors reclaim their "profits," Ponzi schemes encourage them to stay in the game and earn even more money. The "investing strategies" used are vague and/or secretive, which schemers claim is to protect their business. Then all they need to do is tell investors how much

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they are making periodically, without actually providing any real returns. Ponzi schemes aren't usually very sustainable. The setup eventually falls apart after: (1) The operator takes the remaining investment money and runs. (2) New investors become harder to find, meaning the flow of cash dies out. (3) Too many current investors begin to pull out and request their returns. In Madoff's case, things began to deteriorate after clients requested a total of $7 billion back in returns. Unfortunately for Madoff, he only had $200 million to $300 million left to give. Another reason Madoff managed to fly under the radar for so long (despite multiple reports to the SEC about suspicions of a Ponzi scheme), is because Madoff was a well-versed and active member of the financial industry. He started his own market maker firm in 1960 and helped launch the Nasdaq stock market. He sat on the board of National Association of Securities Dealers and advised the Securities and Exchange Commission on trading securities. It was easy to believe this 70-year-old industry veteran knew exactly what he was doing. Madoff really only made off with $20 billion, even though on paper he cheated clients out of $65 billion, according to CNNMoney . That's hardly any consolation for his thousands of investors, the full list of whom can be found with WSJ here . The 150-year sentence, more symbolic than literal, was followed by other convictions related to Madoff's scheme. In March this year, five of Madoff's employees were found guilty for their part in the Ponzi scheme. Most recently, Madoff's accountant and lawyer is also facing up to 30 years in prison for his role.

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Price gouging is usually defined as raising prices on certain kinds of goods to an unfair or excessively high level during an emergency. Although price gouging is illegal in 34 states, economics professor Matt Zwolinski asks whether price gouging should be illegal. He uses an example to examine the moral status of price gouging. The following points suggest that price gouging may not be immoral after all:  Consumers do not have to buy products for the higher price. If they decide to pay, it is likely because they are getting more from the product than they’re paying.  If the prices for important goods do not go up, it is likely that scarce resources will not be available for those who need them most.  For buyers, high prices reduce demand and encourage conservation. People who may need something more are likely to pay more. For sellers, being able to charge higher prices creates a profit incentive to encourage more sellers to bring products to the market.  The profit motive will increase competition and eventually drive down the price. What alternative institutions would do better? When price gouging is prohibited goods go to whoever shows up first. Even if we assume that price gouging is immoral, it almost certainly should not be illegal. The only reason price gouging occurs is because demand is high and supply is low. Professor Zwolinski argues that even if you think that price gouging is morally wrong, making it illegal doesn’t make sense. It hurts the very people who need our help most. he LIBOR scandal involved bankers from various financial institutions providing information on the interest rates they would use to calculate LIBOR. Evidence suggests that this collusion had been active since at least 2005, potentially earlier than 2003. Deutsche Bank, Barclays, UBS, Rabobank, HSBC, Bank of America, Citigroup, JPMorgan Chase, the Bank of Tokyo Mitsubishi, Credit Suisse, Lloyds, WestLB, and the Royal Bank of Scotland were notable in the scandal, among others. Next Up 1. LIBOR Curve 2. Euro LIBOR 3. Interest Rate Index

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4. British Bankers Association - BBA 5. BREAKING DOWN 'The LIBOR Scandal' The LIBOR scandal was significant due to the role the LIBOR plays internationally. LIBOR is an important interest rate when it comes to global finance. It is used to determine the price that businesses pay for loans and individuals pay for mortgages , and is also used in derivative pricing. In aggregate the LIBOR underpins ~$300 trillion of loans, globally. It is supposed to represent the interest rate that a bank pays to borrow from another bank. The scandal involved banks understating the interest rate, which in aggregate, could keep the LIBOR rate artificially low. LIBOR is also used as an indicator of a bank’s health, and the manipulation of the rate leading up to the 2007-2008 financial crisis made some financial institutions appear stronger than they actually were. The LIBOR Scandal: The Details The brashness of bankers involved in the scandal became evident as emails and phone records were released during investigations. Evidence showed traders openly asking others to set rates at a specific amount so that a position would be profitable. Regulators in both the United States and United Kingdom levied ~$9 billion of dollars in fines on banks involved in the scandal, as well as a slew of criminal charges. Because LIBOR is used in the pricing of many financial instruments , corporations and governments have also filed lawsuits, alleging that the rate fixing negatively affected them. Policy Shifts After the LIBOR Scandal Following the unveiling of the LIBOR collusion, Britain’s Financial Conduct Authority (FCA) removed LIBOR supervision from the British Bankers’ Association (BBA) and delivered it to the ICE Benchmark Administration (IBA) . The IBA is an independent UK subsidiary of the private U.S.-based exchange operator Intercontinental Exchange (ICE). LIBOR is now commonly known as LIBOR ICE. This shift been significant in restoring its credibility and integrity. At the end of June, Barclays was fined £290 million for fixing its rates, a scandal that has forced three of its bosses, including chief executive Bob Diamond, to resign and prompted the Serious Fraud Office to launch a full-scale inquiry. So what is the furore all about and how does it affect you?

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What is Libor? The London Inter Bank Offer Rate (Libor) is the rate of interest at which banks lend to one another. It is calculated every day and is based on submissions from a panel of leading City of London banks. Each morning, the panel members tell the British Bankers' Association (BBA) how much interest they believe they would need to pay to borrow from fellow banks over a range of specified time periods. The UK sterling rate is based on submissions from 16 banks - the top and bottom four rates are excluded and an average is calculated from the eight remaining submissions. Libor is the world's primary benchmark of short-term interest rates and influences the price of trillions of pounds of financial transactions every year. Why did Barclays rig the rates? Each bank's submission to the BBA is also important because it provides an indication of its perceived financial strength. The lower the rate it is able to quote, the stronger it is deemed to be and, consequently, the cheaper it is for it to borrow. Between 2007 and 2009 - the height of the financial crisis - regulators found that Barclays traders had submitted artificially low figures in an attempt to conceal the liquidity problems the bank was facing. From 2005 to 2008, traders had also manipulated rates in order to boost their profits. Who else is involved? It is thought the Barclays case is just the tip of the iceberg and that numerous banks in the UK and overseas have been playing the same game. Earlier this year, and prior to Barclays' landmark fine, both UBS and the Royal Bank of Scotland took action against staff involved in rate-rigging. The Serious Fraud Office is now conducting an industry-wide investigation, while the Financial Services Authority states that it "continues to pursue a number of other significant cross-border investigations in this area". Has it affected my mortgage? Without down-playing the scandal, the good news is that the vast majority of borrowers will not have been affected.

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Ray Boulger, senior technical manager at mortgage adviser John Charcol, estimates that only 2% of mortgages currently being repaid will have a direct link to Libor, and those would have typically been sub-prime, buy-to-let or from a private bank. It could be argued that the Libor-rigging affected retail banks' own funding costs and thereby indirectly had an impact on the pricing of their mortgages and loans. However, Boulger is not convinced and stresses that in the later stages the low-balling of Libor rates would have pushed rates down, not up. "The impact on the borrower would have been marginal if anything, and if it had it would have been beneficial." What about my savings? Savers with money in ordinary savings accounts with banks and building society shouldn't worry that rates have been depressed by Libor rate-rigging. The interest paid on deposits are linked to the Bank of England base rate, not Libor. Ethical relativism is the theory that holds that morality is relative to the norms of one's culture. That is, whether an action is right or wrong depends on the moral norms of the society in which it is practiced. The same action may be morally right in one society but be morally wrong in another. n appropriate example of ethical relativism is one where premarital sex is considered morally unacceptable in many cultures across South-Asia, for instance in India. Ethical relativism is the theory that, because different societies have different ethical beliefs, there is no rational way of determining whether an action is morally right or wrong other than by asking whether the people of this or that society believe it to be right or wrong by asking whether people of a particular society believe that it is. In fact, the multiplicity of moral codes demonstrates that there is no one "right" answer to ethical questions. The best a company can do is follow the old adage, "When in Rome, do as the Romans do." In other words, there are no absolute moral standards However, Though we should not dismiss the moral beliefs of other cultures, we likewise should not conclude that all systems of morality are equally acceptable Teleology (from the Greek telos , meaning goal or end) describes an ethical perspective that contends the rightness or wrongness of actions is based solely on the goodness or badness of their consequences. In a strict teleological interpretation, actions are morally neutral when considered apart from their consequences. Ethical egoism and utilitarianism are examples of teleological theories. Ethical decisions are right or wrong if they lead to either positive or negative results. Investors judge an investment as good or bad, worthwhile or not, based on its expected return. If the actual return is below the investor’s expectation, it is deemed to be a bad investment decision; if the return is greater than expected, it is considered a good or worthwhile investment decision. The ethicality of the decision maker and the decision are determined on the basis of the action or the consequneces. If the decision brings about a positive resut such as helping an individual ro achieve self- realization, then the decision is said to be an ethically correct one. About consequentialism

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Consequentialism: results-based ethics The Internet Encyclopedia of Philosophy gives a plain and simple definition of consequentialism: Of all the things a person might do at any given moment, the morally right action is the one with the best overall consequences. Internet Encyclopedia of Philosophy: Consequentialism Consequentialism is based on two principles:  Whether an act is right or wrong depends only on the results of that act  The more good consequences an act produces, the better or more right that act It gives us this guidance when faced with a moral dilemma:  A person should choose the action that maximises good consequences And it gives this general guidance on how to live:  People should live so as to maximise good consequences Different forms of consequentialism differ over what the good thing is that should be maximised.  Utilitarianism states that people should maximise human welfare or well-being (which they used to call 'utility' - hence the name).  Hedonism states that people should maximise human pleasure.  Other forms of consequentialism take a more subtle approach; for example stating that people should maximise the satisfaction of their fully informed and rational preferences. In practice people don't assess the ethical consequences of every single act (that's called 'act consequentialism') because they don't have the time. Instead they use ethical rules that are derived from considering the general consequences of particular types of acts. That is called 'rule consequentialism'.  So, for example, according to rule consequentialism we consider lying to be wrong because we know that in general lying produces bad consequences. Results-based ethics produces this important conclusion for ethical thinking:  No type of act is inherently wrong - not even murder - it depends on the result of the act This far-fetched example may make things clearer:  Suppose that by killing X, an entirely innocent person, we can save the lives of 10 other innocent people

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 A consequentialist would say that killing X is justified because it would result in only 1 person dying, rather than 10 people dying  A non-consequentialist would say it is inherently wrong to murder people and refuse to kill X, even though not killing X leads to the death of 9 more people than killing X Utilitarianism Evaluating each decision would take too long. Photo: Liz Fagoli © The classic form of results-based ethics is called utilitarianism. This says that the ethically right choice in a given situation is the one that produces the most happiness and the least unhappiness for the largest number of people. The appeal of results-based ethics Results-based ethics plays a very large part in everyday life because it is simple and appeals to common sense:  It seems sensible to base ethics on producing happiness and reducing unhappiness  It seems sensible to base ethics on the consequences of what we do, since we usually take decisions about what to do by considering what results will be produced  It seems easy to understand and to be based on common sense Top Act consequentialism Act consequentialism Act consequentialism looks at every single moral choice anew. It teaches:  A particular action is morally good only if it produces more overall good than any alternative action.

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Good points of act consequentialism A flexible system  Act consequentialism is flexible and can take account of any set of circumstances, however exceptional. Bad points of act consequentialism Impractical for real life use  while it sounds attractive in theory, it’s a very difficult system to apply to real life moral decisions because:  every moral decision is a completely separate case that must be fully evaluated  individuals must research the consequences of their acts before they can make an ethically sound choice  doing such research is often impracticable, and too costly  the time taken by such research leads to slow decision-making which may itself have bad consequences, and the bad consequences of delay may outweigh the good consequences of making a perfect decision  but where a very serious moral choice has to be made, or in unusual circumstances, individuals may well think hard about the consequences of particular moral choices in this way Bad for society  some people argue that if everyone adopted act consequentialism it would have bad consequences for society in general  this is because it would be difficult to predict the moral decisions that other people would make, and this would lead to great uncertainty about how they would behave  some philosophers also think that it would lead to a collapse of mutual trust in society, as many would fear that prejudice or bias towards family or other groups would more strongly influence moral decisions than if people used general moral rules based on consequentialism  fortunately the impracticality of act consequentialism as a general moral process means we don't have to worry much about this Top Rule consequentialism

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Rule consequentialism Rule consequentialism bases moral rules on their consequences. This removes many of the problems of act consequentialism. Rule consequentialism teaches:  Whether acts are good or bad depends on moral rules  Moral rules are chosen solely on the basis of their consequences So when an individual has a moral choice to make they can ask themselves if there's an appropriate rule to apply and then apply it. The rules that should be adopted are the rules that would produce the best results if they were adopted by most people. Philosophers express this with greater precision:  an act is right if and only if it results from the internalisation of a set of rules that would maximize good if the overwhelming majority of agents internalised this set of rules And here's another version: An action is morally right if and only if it does not violate the set of rules of behaviour whose general acceptance in the community would have the best consequences--that is, at least as good as any rival set of rules or no rules at all. Internet Encyclopedia of Philisophy: Consequentialism Good points of rule consequentialism Practical and efficient  Rule consequentialism gets round the practical problems of act consequentialism because the hard work has been done in deriving the rules; individuals don't generally have to carry out difficult research before they can take action  And because individuals can shortcut their moral decision-making they are much more likely to make decisions in a quick and timely way Bad points of rule consequentialism Less flexible  Because rule consequentialism uses general rules it doesn't always produce the best result in individual cases  However, those in favour of it argue that it produces more good results considered over a long period than act consequentialism

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 One way of dealing with this problem - and one that people use all the time in everyday life - is to apply basic rules, together with a set of variations that cover a wide range of situations. These variations are themselves derived in the same way as the general rules Other forms of consequentialism Negative Consequentialism Negative consequentialism is the inverse of ordinary consequentialism. Good actions are the ones that produce the least harm.  A person should choose the act that does the least amount of harm to the greatest number of people. Top Against consequentialism Against consequentialism Consequentialism has both practical and philosophical problems: Future consequences are difficult to predict  it's hard to predict the future consequences of an act  in almost every case the most we can do is predict the probability of certain consequences following an act  and since my behaviour is based on my assessment of the consequences, should the rightness or wrongness of an act be assessed on what I thought was going to happen or what actually happened? Measuring and comparing the 'goodness' of consequences is very difficult  people don't agree on what should be assessed in calculating good consequences  is it happiness, pleasure, satisfaction of desire or something else?  It's hard to measure and compare the 'goodness' of those consequences  how, for example, do you measure happiness?  how do you compare a large quantity of happiness that lasts for a few minutes with a gentle satisfaction that lasts for years?  how do you measure any 'subjective' quality?  Choosing different time periods may produce different consequences  for example, using cheap energy may produce good short-term economic results, but in the long- term it may produce bad results for global climate

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It is easy to bias in favour of particular groups  choosing different groups of people may produce different consequences  an act that produces a good result for group X may at the same time produce a bad result for group Y, or for society in general  so the ethical choices people make are likely to be different according to which group they use for their moral calculations  the most common solution to this problem is to look at the consequences for a large group such as 'society in general'  alternatively, ethicists can try to look at things from the standpoint of an 'ideal', fully informed and totally neutral observer It ignores things we regard as ethically relevant  results-based ethics is only interested in the consequences of an act  the intentions of the person doing the act are irrelevant  so an act with good results done by someone who intended harm is as good as if it was done by someone who intended to do good  the past actions of the person doing the act are irrelevant  the character of the person doing the act is irrelevant  the fairness of the consequences are not directly relevant And these are things that many think are relevant to ethical judgements. However, in support of consequentialism it might be argued that many of the things listed above do influence the good or bad consequences of an act, particularly when formulating ethical rules, and so they become incorporated in consequentialist ethical thinking; but only through the back door, not directly. It doesn't take account of the 'fairness' of the result Simple forms of consequentialism say that the best action is the one that produces the largest total of happiness. This ignores the way in which that happiness is shared out and so would seem to approve of acts that make most people happy, and a few people very unhappy, or that make a few people ecstatically happy and leave the majority at best neutral. It also detracts from the value of individuals and their own interests and projects, other than when those are in line with the interests of the group.

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It can be inconsistent with human rights Consider this situation: A billionaire needs an organ transplant. He says that if he is given the next suitable organ he will fund 1000 hip-replacements a year for 10 years. Giving him the next available organ means Mr X, who was top of the list, will die - but it also means that thousands of people will be very happy with their new hips. Consequentialism might be used to argue that Mr X's human rights (and his and his family's happiness) should be ignored, in order to increase the overall amount of human well-being. For a utilitarian, the end never justify the means. Instead, the moral agent must consider the consequences of the decision in terms of producing happiness or in therms of the rule that, if followed will probably produce the happiness for all Weakness in Utilitianism Utilitarianism presupposes that such things as happiness, utility , pleasure , pain and anguish can be quantified . There is no common unit for happiness. Another problem concerns the distribution and internsity of happiness. The utilitarian principle is to produce as much as happiness as possible and to distribute the happiness to as many as is possible. Another measurement problem concerns scope. Ie. The short term happiness of current generation may come at the pain of future generarion. Utilitarianism ignores motivation and focuses only on consequences. This leaves many people unsatisfies- The road to hell is paved with good intentions, Deontology Deontology (or Deontological Ethics) is an approach to Ethics that focuses on the rightness or wrongness of actions themselves, as opposed to the rightness or wrongness of the consequences of those actions (Consequentialism) or to the character and habits of the actor o a Deontologist, whether a situation is good or bad depends on whether the action that brought it about was right or wrong. What makes a choice "right" is its conformity with a moral norm : Right takes priority over Good. For example , if someone proposed to kill everyone currently living on land that could not support agriculture in order to bring about a world without starvation, a Deontologist would argue that this world without starvation was

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a bad state of affairs because of the way in which it was brought about. A Consequentialist would (or could) argue that the final state of affairs justified the drastic action. A Virtue Ethicist would concern himself with neither , but would look at whether the perpetrator acted in accordance with worthy virtues . Deontology may sometimes be consistent with Moral Absolutism (the belief that some actions are wrong no matter what consequences follow from them), but not necessarily . For instance, Immanuel Kant famously argued that it is always wrong to lie, even if a murderer is asking for the location of a potential victim. But others, such as W.D. Ross (1877 - 1971), hold that the consequences of an action such as lying may sometimes make lying the right thing to do ( Moral Relativism ). It is sometimes described as "duty- based" or "obligation-based" ethics, because Deontologists believe that ethical rules bind people to their duty . The term "deontology" derives from the Greek "deon" meaning "obligation" or "duty", Kant's Categorical Imperative The Categorical Imperative Immanuel Kant © Kant's version of duty-based ethics was based on something that he called 'the categorical imperative' which he intended to be the basis of all other rules (a 'categorical imperative' is a rule that is true in all circumstances.)

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The categorical imperative comes in two versions which each emphasise different aspects of the categorical imperative. Kant is clear that each of these versions is merely a different way of expressing the same rule; they are not different rules. Moral rules must be universalisable The first one emphasises the need for moral rules to be universalisable. Always act in such a way that you can also will that the maxim of your action should become a universal law. To put this more simply: Always act in such a way that you would be willing for it to become a general law that everyone else should do the same in the same situation. This means at least two things:  if you aren't willing for the ethical rule you claim to be following to be applied equally to everyone - including you - then that rule is not a valid moral rule. I can't claim that something is a valid moral rule and make an exception to it for myself and my family and friends. So, for example, if I wonder whether I should break a promise, I can test whether this is right by asking myself whether I would want there to be a universal rule that says 'it's OK to break promises'. Since I don't want there to be a rule that lets people break promises they make to me , I can conclude that it would be wrong for me to break the promise I have made.  if the ethical rule you claim to be following cannot logically be made a universal rule, then it is not a valid moral rule. So, for example, if I were thinking philosophically I might realise that a universal rule that 'it's OK to break promises in order to get one's own way', would mean that no-one would ever believe another person's promise and so all promises would lose their value. Since the existence of promises in society requires the acceptance of their value, the practice of promising would effectively cease to exist. It would no longer be possible to ‘break’ a promise, let alone get one’s own way by doing so. Moral rules must respect human beings Kant thought that all human beings should be treated as free and equal members of a shared moral community, and the second version of the categorical imperative reflects this by emphasising the importance of treating people properly. It also acknowledges the relevance of intention in morality.

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Act so that you treat humanity, both in your own person and in that of another, always as an end and never merely as a means. ...man and, in general, every rational being exists as an end in himself and not merely as a means to be arbitrarily used by this or that will. In all his actions, whether they are directed to himself or to other rational beings, he must always be regarded at the same time as an end... Immanuel Kant, The Categorical Imperative Kant is saying that people should always be treated as valuable - as an end in themselves - and should not just be used in order to achieve something else. They should not be tricked, manipulated or bullied into doing things. This resonates strongly with disapproving comments such as "he's just using her", and it underpins the idea that "the end can never justify the means". Here are three examples of treating people as means and not ends:  treating a person as if they were an inanimate object  coercing a person to get what you want  deceiving a person to get what you want Kant doesn't want to say that people can't be used at all; it may be fine to use a person as long as they are also being treated as an end in themselves. The importance of duty Do the right thing for the right reason, because it is the right thing to do. Kant thought that the only good reason for doing the right thing was because of duty - if you had some other reason (perhaps you didn't commit murder because you were too scared, not because it was your duty not to) then that you would not have acted in a morally good way. But having another reason as well as duty doesn't stop an action from being right, so long as duty was the ‘operational reason’ for our action. If we do something because we know it's our duty, and if duty is the key element in our decision to act, then we have acted rightly, even if we wanted to do the act or were too scared not to do it, or whatever. Weaknesses in Deontology -does not provide clear guideline of which principle to follow when two or moral laws conflict and only one can be chosen

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- In deontology the only thing that matters is the intention of the decision maker and the decision maker’s adherence to obey the categorical imperative while treating people as ends rather than as a mean to an end. -Categorical imperative set a very high standard for many it is a hard ethic to follow. There is no shortage for example where people are not treated with respect and dignity, where they are seen as merely tools in the production cycle to be used and then discarded after their usefulness is gone. - Following one’s duty may result in adverse consequences,such as unjust allocation if resources. Procedural justice concerns the fairness and the transparency of the processes by which decisions are made, and may be contrasted with distributive justice ( fairness in the distribution of rights or resources), and retributive justice ( fairness in the punishment of wrongs). irtue ethics Character-based ethics  A right act is the action a virtuous person would do in the same circumstances. Virtue ethics is person rather than action based: it looks at the virtue or moral character of the person carrying out an action, rather than at ethical duties and rules, or the consequences of particular actions. Virtue ethics not only deals with the rightness or wrongness of individual actions, it provides guidance as to the sort of characteristics and behaviours a good person will seek to achieve. In that way, virtue ethics is concerned with the whole of a person's life, rather than particular episodes or actions.  A good person is someone who lives virtuously - who possesses and lives the virtues. It's a useful theory since human beings are often more interested in assessing the character of another person than they are in assessing the goodness or badness of a particular action. This suggests that the way to build a good society is to help its members to be good people, rather than to use laws and punishments to prevent or deter bad actions. But it wouldn't be helpful if a person had to be a saint to count as virtuous. For virtue theory to be really useful it needs to suggest only a minimum set of characteristics that a person needs to possess in order to be regarded as virtuous. ...being virtuous is more than having a particular habit of acting, e.g. generosity. Rather, it means having a fundamental set of related virtues that enable a person to live and act morally well.

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James F Keenan, Proposing Cardinal Virtues, Theological Studies, 1995 Principles Virtue ethics teaches:  An action is only right if it is an action that a virtuous person would carry out in the same circumstances.  A virtuous person is a person who acts virtuously  A person acts virtuously if they "possess and live the virtues"  A virtue is a moral characteristic that a person needs to live well. Most virtue theorists would also insist that the virtuous person is one who acts in a virtuous way as the result of rational thought (rather than, say, instinct). The three questions The modern philosopher Alasdair MacIntyre proposed three questions as being at the heart of moral thinking:  Who am I?  Who ought I to become?  How ought I to get there? Lists of the virtues What would a virtuous person do? © Most virtue theorists say that there is a common set of virtues that all human beings would benefit from, rather than different sets for different sorts of people, and that these virtues are natural to mature human beings - even if they are hard to acquire. This poses a problem, since lists of virtues from different times in history and different societies show significant differences. The traditional list of cardinal virtues was:  Prudence

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 Justice  Fortitude / Bravery  Temperance The modern theologian James F Keenan suggests:  Justice  Justice requires us to treat all human beings equally and impartially.  Fidelity  Fidelity requires that we treat people closer to us with special care.  Self-care  We each have a unique responsibility to care for ourselves, affectively, mentally, physically, and spiritually.  Prudence  The prudent person must always consider Justice, Fidelity and Self-care.  The prudent person must always look for opportunities to acquire more of the other three virtues Good points of virtue ethics  It centres ethics on the person and what it means to be human  It includes the whole of a person's life Bad points of virtue ethics  it doesn't provide clear guidance on what to do in moral dilemmas  although it does provide general guidance on how to be a good person  presumably a totally virtuous person would know what to do and we could consider them a suitable role model to guide us  there is no general agreement on what the virtues are  and it may be that any list of virtues will be relative to the culture in which it is being drawn up. 1. Transfer pricing is the setting of the price for goods and services sold between related legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intragroup

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transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length Transfer pricing is the setting of the price for goods and services sold between related legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price . T ransfer pricing is probably the most important consideration for all multinational companies related to international coporate taxation because it impacts the purchasing behavior of subsidiaries and has tax implications for the company as a whole. Governments around the world are cracking down on transfer pricing regulations because of the rise of budget deficits and companies’ use of transfer pricing to avoid taxes. There is a thin, often blurry line, between the legal benefits of transfer pricing and tax avoidance, so it is more important than ever to understand the benefits, implications, and consequences of transfer pricing. Keep reading to learn more about international taxation and transfer pricing. Why is transfer pricing regulated? Transfer pricing is regulated because there are different tax rates in different countries that companies could avoid or take advantage of. Without these regulations, companies would use transfer pricing to get the best rates for their separate entities. For example, transfer pricing without this principle could be used to lower profits in one division of an entity located in a country with high income taxes and raise profits in a country that is a tax haven, that is with no or low income taxes. Most governments with transfer pricing regulations have given their tax authorities the authority to adjust the prices charged between entities, even if there was no intent to avoid taxes. Transfer pricing regulations generally require that the transfer price be appropriate. To determine the appropriateness of a transaction, almost all countries with transfer pricing regulations use the arm’s length principle, which the OECD provides guidance on. So, what is this arm’s length principle? What is the arm’s length principle? The arm’s length principle is a universal (global) standard that ensures intercompany transactions are appropriate, which is to say, similar to that of transactions with a third party. A price will be considered appropriate if it is the same price (or range) that an independent buyer would pay an independent seller for an identical item, under identical terms and conditions, and without any compulsion to act. A good way to check the pricing for accuracy (or “fairness”) is to back away from the sale and consider it from a third party’s point of view. If it wasn’t a related company, would the transaction still occur? Would company A sell services to company B at the same margin if company B were not a subsidiary? The best way to determine whether the company has complied with the arm’s length requirement is to compare the transaction to another similar company. Using this similar company as a guide for pricing is called benchmarking and is useful for avoiding tax penalties. How do you determine the appropriate transfer price?

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Companies and governments have several different methods available to them to determined the appropriate transfer price, but the most common method is comparability (in the US, “comparable profits method” (CPM) and outside the US, “transactional net margin method” (TNMM)). Comparability is what it sounds like it is, when transactions are compared for similarities. In the context of transfer pricing, a transaction is appropriate when it is comparable to another similar transaction. Comparability is best when identical items (including terms and conditions) are compared. However, because identical items are not always available, those different factors are taken into consideration in determining the appropriate price. Transfer pricing can be complicated, particularly if you are new to the concept. Because violations can result in taxation issues in multiple jurisdictions, it is important to comply with all applicable transfer pricing regulations. Most accounting and tax firms can help you with your transfer pricing questions and concerns. Cameco Transfer Pricing The CRA disputed Cameco’s corporate structure, specifically the reorganization that took place in 1999, along with the transfer pricing method used for intercompany uranium sale and purchase agreements with its Swiss subsidiary, Cameco Europe Ltd. (“SwissCo”). At question is whether Cameco used SwissCo to avoid tax by shifting profits from Canada to Switzerland, a low-tax jurisdiction. Cameco maintains that SwissCo was carrying on the business of buying and selling uranium, and that establishing SwissCo was a legal and sound business practice. The opening remarks for the transfer pricing dispute between Cameco Corp. (“Cameco”) and the CRA were heard in early October 2016. [2] After 65 days of trial, both parties delivered their closing arguments in September 2017. We will continue to follow this case and will publish our analyses of the TCC’s decision once such a decision becomes available. The concluding remarks were made before the TCC in September 2017, and a decision by the court is expected approximately six to 18 months from this date. Notwithstanding that the case is still in dispute, it is possible to foresee its impact on Canadian taxation, as evidenced by the following. Tax Planning in Canada Is Entirely Legal

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Tax planning is permitted in Canada as the Crown reaffirmed in its positions during the trial. Canadian taxpayers are allowed to plan their tax affairs in order to minimize their tax bill, as long as their planning and implementation do not violate the legislation in force. ‘Form vs. Substance’ Dilemma: Case Outcome Will Tip Argument Taxpayers and CRA auditors will reference this case in tax and transfer pricing audits in Canada as a classic example of the “form versus substance” dilemma. Certainly, the dilemma arises in practice whenever there is some suspicion or debate that the form (legal agreements, legal documents, invoices and other paperwork) is not consistent with the substance (facts). This case will certainly generate very important messages and set precedents in this respect. There is a fierce dispute between Cameco and the Crown as to whether the legal documentation put in place by Cameco in fact represented the actual role and activities of the parties involved in the transactions. We will not express an opinion on whether Cameco’s documentation corresponded to the reality of the transactions, simply because only the parties involved have all the facts and documents relevant. Rather, we focus on the possible impact of the case on the behavior of the Canadian taxpayers and the CRA’s auditors. In this sense, assuming that Cameco “wins” the case, the “form” argument prevails, setting a precedent whereby it will likely be easier for Canadian taxpayers to rely on legal documentation and paperwork to support their positions in future disputes with the CRA’s auditors. This legal documentation may include, for example, intercompany agreements, invoices, correspondence (e.g., emails), legal existence of entities and legal governance bodies (e.g., board of directors). Thus, if Cameco wins, in cases where the substance is debatable, but the legal documentation is in place and well prepared, the taxpayer will be able to refer to Cameco to challenge the CRA auditor’s intention to scrutinize what is “beyond” the appearance of the legal documents.

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In other words, a win by Cameco may give Canadian taxpayers an important tool to argue that the CRA auditors must respect the form of their transactions and should not attempt to look beyond the written documents in order to develop a version of the facts that may contradict the formal documents. A Cameco win may also signal to taxpayers that legal documentation and paperwork can provide substantial protection against the CRA’s challenges under the scenarios of a CRA audit. On the other hand, assuming that the Crown/CRA “wins,” CRA auditors may view this case as a victory of the “substance,” and they may become more inclined to disregard provisions in intercompany agreements, other legal documents, and paperwork when they are seeking a certain audit result. The Cameco precedent may provide CRA auditors with support for an audit based on unveiling facts that are beyond the legal documents. This is certainly a worrying scenario, as it may open the door for CRA auditors to more easily challenge the transactions as described and seen by the taxpayers. A win by the Crown/CRA would also signal to taxpayers that legal documentation and paperwork may not provide much protection against the CRA’s positions during an audit. Income Smoothing Income smoothing refers to reducing the fluctuations in a corporation's earnings. Income smoothing can range from good business methods to fraudulent reporting. Some business practices are ethical and will result in income smoothing. For example, a corporation might have an employee bonus plan, a deferred profit sharing plan, and a charitable giving plan that will result in expenses that total 25% of its pretax profits. In addition, a U.S. corporation might have a combined federal and state income tax rate of 40% on its incremental pretax profits. These examples will smooth income by causing huge expenses when profits are huge, and will result in little expense when profits are little. (Losses could actually result in a negative income tax expense.) In a year of low profits a corporation might eliminate jobs and postpone maintenance expenses. When profits are higher the corporation will add jobs and perform the maintenance that it had avoided. The term income smoothing is more likely associated with the manipulation of earnings, creative accounting and the aggressive interpretation and application of generally accepted accounting principles. Perhaps a company will increase its allowance for doubtful accounts with a significant charge to bad debts expense in the years with high profits. Then in years of low profits, the company

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will reduce the allowance for doubtful accounts. Perhaps a U.S. manufacturer using LIFO will deliberately reduce its inventory quantities in low profit years in order to liquidate the old LIFO layers containing low unit costs. Other manufacturers might increase production when sales and profits are low in order to have lower unit costs. Smoothing income by abusing the leeway in accounting principles is unethical and does a disservice to the users of the financial statements. Accountants should follow their general guidelines such as consistency , comparability, neutrality, full disclosure and conservatism . What is 'Earnings Management' Earnings management is the use of accounting techniques to produce financial reports that present an overly positive view of a company's business activities and financial position. Many accounting rules and principles require company management to make judgments following these principles. Earnings management takes advantage of how accounting rules are applied and creates financial statements that inflate earnings, BREAKING DOWN 'Earnings Management' Companies use earnings management to smooth out fluctuations in earnings and present more consistent profits each month or year. Large fluctuations in income and expenses may be a normal part of a company's operations, but the changes may alarm investors who prefer to see stability and growth. A company's stock price often rises or falls after an earnings announcement , depending on whether the earnings meet or fall short of expectations. How Managers Feel Pressure Management can feel pressure to manage earnings by manipulating the company's accounting practices to meet financial expectations and keep the company's stock price up. Many executives receive bonuses based on earnings performance, and others may be eligible for stock options that generate a profit when the stock price increases. Many forms of earnings manipulation are eventually uncovered, either by a CPA firm performing an audit or through required SEC (Securities and Exchange Commission) disclosures. Examples of Manipulation One method of manipulation when managing earnings is to change an accounting policy that generates higher earnings in the short term. For example, assume a furniture retailer uses the last-in, first-out (LIFO) method to account for the cost of inventory items sold. Under LIFO, the newest units purchased are sold first. Since inventory costs typically increase over time, the newer units are more expensive, and this creates a higher cost of sales and a lower profit. If the retailer switches to the first-in, first- out (FIFO) method of recognizing inventory costs, the company sells the older, less-

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expensive units first. FIFO creates a lower cost of sales expense and a higher profit so the company can post higher profits in the short term. Through earnings management, another form of manipulation is to change company policy so more costs are capitalized rather than expensed immediately. Capitalizing costs as assets delays the recognition of expenses and increases profits in the short term. Assume, for example, company policy dictates that every expense under $1,000 is immediately expensed and costs over $1,000 may be capitalized as assets. If the firm changes the policy and starts to capitalize far more assets, expenses decrease in the short term and profits increase. Factoring in Accounting Disclosures A change in accounting policy, however, must be explained to financial statement readers, and that disclosure is usually stated in a footnote to the financial statements . The disclosure is required because of the accounting principle of consistency. Financial statements are comparable if the company uses the same accounting policies each year, and any change in policy must be explained to the financial report reader. As a result, this type of earnings manipulation is usually uncovered. The right thing to do depends on the situation © In situation ethics, right and wrong depend upon the situation. There are no universal moral rules or rights - each case is unique and deserves a unique solution. Situation ethics rejects 'prefabricated decisions and prescriptive rules'. It teaches that ethical decisions should follow flexible guidelines rather than absolute rules, and be taken on a case by case basis. ...reflective morality demands observation of particular situations, rather than fixed adherence to a priori principles John Dewey and James H. Tufts, Ethics, 1922 So a person who practices situation ethics approaches ethical problems with some general moral principles rather than a rigorous set of ethical laws and is prepared to give up even those principles if doing so will lead to a greater good.

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Since 'circumstances alter cases', situationism holds that in practice what in some times and places we call right is in other times and places wrong... For example, lying is ordinarily not in the best interest of interpersonal communication and social integrity, but is justifiable nevertheless in certain situations. Joseph Fletcher, Naturalism, situation ethics and value theory, in Ethics at the Crossroads, 1995 Situation ethics was originally devised in a Christian context, but it can easily be applied in a non-religious way. Elements of situation ethics The elements of situation ethics were described by Joseph Fletcher, its leading modern proponent, like this:  Moral judgments are decisions, not conclusions  Decisions ought to be made situationally, not prescriptively  We should seek the well-being of people, rather than love principles.  Only one thing is intrinsically good, namely, love: nothing else  Love, in this context, means desiring and acting to promote the wellbeing of people  Nothing is inherently good or evil, except love (personal concern) and its opposite, indifference or actual malice  Nothing is good or bad except as it helps or hurts persons  The highest good is human welfare and happiness (but not, necessarily, pleasure)  Whatever is most loving in a situation is right and good--not merely something to be excused as a lesser evil  Moral theology seeks to work out love's strategy, and applied ethics devises love's tactics.  Love "wills the neighbour's good" [desires the best for our neighbour] whether we like them or not  The ultimate norm of Christian decisions is love: nothing else  The radical obligation of the Christian ethic to love even the enemy implies unmistakably that every neighbour is not a friend and that some are just the opposite.  Love and justice are the same, for justice is love distributed  Love and justice both require acts of will  Love and justice are not properties of actions, they are things that people either do or don't do  Love and justice are essentially the same  Justice is Christian love using its head--calculating its duties. The Christian love ethic, searching seriously for a social policy, forms a coalition with the utilitarian principle of the 'greatest good of the greatest number.'  The rightness depends on many factors  The rightness of an action does not reside in the act itself but in the loving configuration of the factors in the situation--in the 'elements of a human act' --i.e., its totality of end, means, motive, and foreseeable consequences.

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[The text above is based on material in Moral Responsibility: Situation Ethics at Work , by Joseph Fletcher; Westminster Press, 1967] Top Good and bad points Good points of situation ethics Situation ethics is a personal approach © It's personal Situation ethics is sensitive to circumstances, context, particularity, and cultural traditions. Every moral decision is required to demonstrate respect for individuals and communities and the things that they regard as valuable. This avoids the logical, detached, impersonal ways of thinking that some people think are overemphasised in some other forms of ethics. It's particular Because moral decisions are treated on a case-by-case basis, the decision is always tailored to particular situations. It's based on doing good Situation ethics teaches that right acts are those motivated by the wish to promote the well- being of people. Bad points of situation ethics By the 1970s, situation ethics had been roundly rejected as no ethics at all... Daniel Callahan, Universalism & Particularism, The Hastings Center Report, 2000 It excludes most universal moral truths By doing this it seems to remove any possibility of guaranteeing universal human rights, and satisfying human needs for a useful ethical framework for human behaviour.

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It's not clear what 'love' means Although the notion of love used in situation ethics seems attractive, it's pretty vague and can be interpreted in many ways. It's difficult to implement Situation ethics seems to be little more than a form of act consequentialism, in that a person can only choose the right thing to do if they consider all the consequences of their possible action, and all the people who may be affected. It can't produce consistent results Situation ethics produces a lack of consistency from one situation to the next. It may be both easier, and more just and loving, to treat similar situations similarly - thus situation ethics should not be treated as a free-for-all, but should look for precedents while continuing to reject rigid ethical rules. It may approve of 'evil' acts Situation ethics teaches that particular types of action don't have an inherent moral value - whether they are good or bad depends on the eventual result. So it seems that situation ethics permits a person to carry out acts that are generally regarded as bad, such as killing and lying, if those acts lead to a sufficiently good result. This is an uncomfortable conclusion, but one that affects other ethical theories as well. Moreover, it does seem to be accepted in certain situations. As an obvious example, killing people is generally regarded as bad, but is viewed as acceptable in some cases of self defence. The popular TV drama 24 regularly brought up this issue with regards to torture. The characters in the drama claimed they were justified in the (sometimes brutal) torture of suspects because the information gained in doing so saved thousands of lives.

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Situational Ethics by Gary Ryan Blair in Rants and Raves Consistency—the absence of contradictions—has sometimes been called the hallmark of ethics. Ethics is supposed to provide us with a guide for moral living, and to do so it must be rational, and to be rational it must be free of contradictions.

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There is no room for “situational ethics” in business or in any area of your life for that matter. Something is either ethical or it isn’t. The situation does not matter. If a person said, “Open the window but don’t open the window,” we would be at loss as to what to do; the command is contradictory and thus irrational. In the same way, if our ethical principles and practices lack consistency, we, as rational people, will find ourselves at a loss as to what we ought to do and divided about how we ought to live. Ethics requires consistency in the sense that our moral standards, actions, and values should not be contradictory. Examining our lives to uncover inconsistencies and then modifying our moral standards and behaviors so that they are consistent is an important part of moral development. Where are we likely to uncover inconsistency or as what can be referred to as situational ethics? First, our moral standards may be inconsistent with each other. We discover these inconsistencies by looking at situations in which our standards would require incompatible behaviors.

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Suppose, for example, that you believe that it is wrong to disobey your employer, and also believe that it is wrong to harm innocent people. Then suppose that one day your employer insists that you work on a project that might cause harm to innocent people. The situation reveals an inconsistency between my moral standards. You can either obey my employer or you can avoid harming innocent people, but you cannot do both. To be consistent, you must modify one or both of these standards by examining the reasons you have for accepting them and weighing these reasons to see which standard is more important and worth retaining and which is less important and in need of modification. A more important kind of inconsistency is that which can emerge when we apply our moral standards to different situations. To be consistent, we must apply the same moral standards to one situation that we apply to another unless we can show that the two situations differ in relevant ways. You might believe, for example, that you have a right to buy a home in any neighborhood you wish, because you hold that people should be free to live wherever they choose.

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Yet, you are among the first to oppose the sale of the house next door to a group of mentally handicapped persons. But what is the difference between the two situations that justifies this difference in treatment? What is the difference that makes it all right for you to buy a home in any neighborhood, but not them? There is another sense in which the need for consistency enters into ethics. We might hold consistent moral standards and apply them in consistent ways, but we may fail to be consistent in who we are as individuals. We often use the word “integrity” to refer to people who act in ways that are consistent with their beliefs. Here consistency means that a person’s actions are in harmony with his or her inner values. Polonius, a character in Shakespeare’s Hamlet, points out–perhaps with some exaggeration–how critical such integrity is to the moral life when he says to his son, Laertes: This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man. Consistency in our lives also implies an inner integrity. It may be the case that a person’s inner desires are allowed to conflict with each other. For example, a desire to be courageous or honest may be contradicted by a desire to avoid the inconvenience or pain that courage or honesty often requires. Allowing such a conflict is self-defeating because these desires are contradictory. To achieve consistency, we must work to shape our desires to produce a kind of internal harmony.

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So central is consistency to ethics that some moralists have held that it is the whole of ethics. They have argued that if people consistently treat all human beings the same, they will always act ethically. Ethical behavior, they argue, is simply a matter of being consistent by extending to all persons the same respect and consideration that we claim for ourselves. Religion, and I mean all religion seems to imply that ethics consists of nothing more than consistency with the words: For example –  Christianity: Do unto others as you would have them do unto you.  Confucianism: Do not do to others what you would not want them to do to you.  Buddhism: Seek for others the happiness you desire for yourself. Hurt not others with that which pains you.  Hinduism: All your duties are included in this: Do nothing to others that would pain you if it were done to you.  Judaism: That which is hurtful to you, do not do to your fellow man.  Islam: Let none of you treat his brother in a way he himself would not like to be treated. No one of you is a believer until he loves for his brother what he loves for himself.  Taoism: View your neighbor’s gain as your gain, and your neighbor’s loss as your loss. Each of these verses have been interpreted as meaning that all of morality can be summed up in the requirement to avoid contradictions between what one thinks is appropriate for others and what one thinks is appropriate for oneself. But is consistency all there is to ethics? We may be perfectly consistent with respect to our moral principles and values, yet our principles may be incorrect and our values misplaced. We may even be consistent in treating others as we treat ourselves, but this kind of consistency would hardly be the mark of a moral life if we happen to treat ourselves poorly. We might say that while consistency is surely not sufficient for ethics, it is at least necessary for ethics. Ethics requires that there be consistency among our moral standards and in how we apply these standards.

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Ethics also requires a consistency between our ethical standards and our actions, as well as among our inner desires. bjectivism is the philosophical theory that there is no truth outside of one’s own experience. It is contrasted with objectivism, which believes the opposite: that truth exists outside of experience and that, though we may not entirely understand that truth, it is there and it is absolute. Subjectivism says that truth is subjective and that it is basically dependent on the subject’s mind and experience. Subjectivism is quite like relativism in that it says what is true for one person may not be true for another. Determining good and evil must happen on a case-by-case basis, and reality is seen as fluid and plastic, moldable as circumstances demand. One absolute standard, according to the philosophy of subjectivism, does not fit all. It is true that we all have subjective experiences. Part of wisdom is the understanding that other people think and perceive and feel differently. Forcing everyone into the same mold and the same methods is often counterproductive. Two very different personalities can believe objectively in the same truth, even if their way of learning about and relating to that truth is different. Take, for example, the experiences of the apostles Peter and John. Jesus related to those two men in very different ways and taught them each according to what He knew they needed—all without changing Himself or His message ( John 21:15–23 ; Matthew 16:23 ; John 13:23–25 ). Repeatedly, Jesus’ gentleness toward John is evident, while Jesus is tougher and more combative with the strong-willed Peter. Jesus presented the truth differently, but He did not change the truth. He did not espouse subjectivism. He is the truth ( John 14:6 ). Subjectivism says that truth actually changes to fit the individual. Largely, subjectivism is a postmodern reaction to the horrible conflicts that have arisen from people fighting over the definition of truth. Over the centuries, the world has been embroiled in many conflicts, with all parties claiming the high ground based on the “truth” they espouse. People have been oppressed because of their beliefs, it seems, since the beginning of time. Given this history, a society whose philosophy is subjectivism feels safe and progressive. But subjectivism brings its own chaos. Today, many in our world empathize with terrorists, puzzle over how many genders there are, and question the very reality of reality.

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