ACCA AFM ESG & Ethics Questions: Full Marks Framework

ACCA AFM ESG & Ethics Questions: Framework for Scoring Full Marks

ACCA AFM ESG (Environmental, Social, Governance) and ethics questions appear in nearly every Section A exam sitting — typically carrying 7–9 marks plus professional skills marks — yet the examiner consistently reports that this is "the least well attempted part" of the paper. This guide provides a structured 3-pillar answering framework with real examiner feedback from the Drimpton Co (SD25) and Kampai Co (MJ25) sittings, so you can turn ESG from a mark-losing afterthought into a reliable scoring opportunity.

In our experience coaching ACCA students at Eduyush, ESG is the topic where confident, well-prepared candidates lose marks they shouldn't — not because they don't know what ESG means, but because they run out of time or fall into the trap of writing generic content. The MJ25 and SD25 examiner reports make this painfully clear: candidates who write "the company should consider the environment" earn zero marks. Candidates who write "the proposed factory in Edricer will increase carbon emissions from manufacturing air conditioning units; Drimpton Co should commission an environmental impact assessment and invest in energy-efficient production equipment to mitigate reputational risk with environmentally conscious customers" earn full marks.

This guide gives you the structured answering framework that turns ESG from a last-minute panic into a predictable mark-earner. If you're building your AFM foundations, see our ACCA AFM Technical Articles guide for the full syllabus overview, and our Top 10 AFM Mistakes guide for common errors across all topics.

What Does ESG Mean in ACCA AFM?

ESG in ACCA AFM is not generic corporate social responsibility. It refers specifically to how environmental, social, and governance factors integrate into financial decision-making — investment appraisal, mergers and acquisitions, reconstruction, and treasury management. The AFM syllabus explicitly requires you to assess an organisation's commitment to ESG criteria "when undertaking business, financial and investment decisions."

This distinction matters because students who study ESG from SBL notes and apply that approach in AFM consistently lose marks. The AFM examiner does not reward descriptions of ESG frameworks — the examiner rewards scenario-specific identification of issues and feasible, actionable recommendations tied to the company's financial position.

What Does the AFM Syllabus Require for ESG?

Section A3 of the AFM syllabus is titled "Corporate Environmental, Social, Governance (ESG) and Ethical Issues." All six sub-requirements are tested at capability level [3] — the highest level — meaning you must assess, advise, and recommend, not merely identify or describe.

Notice how A3b maps directly to the Environmental pillar (factory emissions, natural resource sustainability), A3c and A3d map to the Social pillar (stakeholder management, workforce impact), and A3e maps to the Governance pillar (agency issues, ethical frameworks). This is not coincidental — the syllabus is structured around the three ESG pillars, and your exam answer should mirror that structure.

The 3-Pillar Framework for Answering ESG Questions

After analysing every AFM examiner report from the last five sittings, we've distilled the examiner's expectations into a structured framework. Every ESG mark in AFM is earned by following three steps — and the examiner penalises answers that skip any step.

The SD25 examiner explicitly confirmed this structure: "The better candidates clearly identified and raised an issue and then recommended a suitable action that the company could take to overcome the issue. Weaker candidates often presented a general discussion where it was hard to distinguish between what was an issue and what was a recommended action."

Environmental Pillar: How to Score Marks

The Environmental pillar (Syllabus A3b) requires you to assess the impact on the physical environment and sustainability of natural resources arising from the company's business, financial, and investment decisions. In AFM, this means connecting environmental factors to specific financial decisions — not writing a generic essay about climate change.

Environmental Issues Commonly Tested in AFM

• Factory emissions and carbon footprint: When the scenario involves manufacturing, ask — does the new investment increase or decrease the company's environmental impact? Drimpton Co (SD25) manufactured air conditioning units and was expanding into a new country.
• Supply chain sustainability: Raw material sourcing, transport logistics, and the environmental cost of global supply chains — particularly relevant when the scenario involves foreign direct investment or establishing overseas subsidiaries.
• Green finance options: Green bonds, sustainability-linked loans, or ESG-linked investment criteria that may affect the cost of capital or access to finance.
• Environmental regulation risk: Different countries have different environmental standards — a factory in a less regulated country raises questions about whether the company is exploiting regulatory arbitrage.
• Product lifecycle impact: Air conditioning units (Drimpton Co) consume energy throughout their operating life — the environmental impact extends beyond manufacturing.

Example: Environmental Point Using the Framework

Social Pillar: How to Score Marks

The Social pillar (Syllabus A3c and A3d) covers how the organisation manages its stakeholder groups and how investment and financing decisions affect those stakeholders. In AFM, the social pillar typically appears in scenarios involving workforce restructuring, overseas expansion into lower-wage economies, factory closures, and community impact — all of which featured in the 2025 exams.

Social Issues Commonly Tested in AFM

• Workforce impact from restructuring: Factory closures, job losses, relocation of production — the Kampai Co (MJ25) question specifically tested the ethics of closing a factory in a less developed area.
• Wage disparity across countries: When expanding overseas, paying local average wages in a low-cost country while paying higher wages at home raises social responsibility questions — the Drimpton Co (SD25) scenario involved workers in Edricer paid "only the average wage for their job."
• Community impact: Especially when a company is a major employer in a region — closing operations affects the wider community, not just employees.
• Stakeholder conflict resolution: Balancing the interests of shareholders (who want cost savings) against employees, communities, and suppliers affected by the decision.
• Health and safety standards: Ensuring overseas operations meet at least the same safety standards as home operations.

The "Equal Pay" Trap — Examiner Warning

This is the single most important lesson for ESG answers: your recommendations must be sensible and feasible. The examiner is testing whether you can think like a senior financial adviser, not whether you can list idealistic goals.

Governance Pillar: How to Score Marks

The Governance pillar (Syllabus A3e) covers the ethical and governance framework, agency issues, and stakeholder conflicts. In AFM, governance typically intersects with M&A questions (board oversight of acquisition decisions), reconstruction scenarios (agency conflicts between managers and shareholders), and treasury management (risk appetite and oversight).

Governance Issues Commonly Tested in AFM

• Agency issues: Management pursuing acquisitions for empire-building rather than shareholder value; directors resisting acquisitions to protect their positions. This was implicit in the Halstock Co (SD25) question where non-executive directors raised concerns about the acquisition price.
• Board oversight and non-executive director role: Ensuring independent scrutiny of major financial decisions, particularly acquisitions — the AFM examiner rewards candidates who reference the governance role of NEDs in acquisition decisions.
• Ethical decision frameworks: Consequentialist (does the action produce the greatest net benefit?) vs deontological (is the action inherently right?) approaches to resolving conflicts.
• Transparency and disclosure: How the company communicates ESG performance to investors, particularly relevant for listed companies where institutional investors apply ESG screening.
• Stakeholder conflict strategies: Mendelow's matrix, stakeholder mapping, and practical resolution approaches — the examiner rewards candidates who propose specific resolution mechanisms, not generic "consult stakeholders" suggestions.

Examiner-Flagged Errors: Drimpton Co (SD25) and Kampai Co (MJ25)

The 2025 examiner reports provide the clearest guidance ever published on how to answer — and how not to answer — ESG questions in AFM. These are direct observations from the marking process.

Drimpton Co — SD25 (Section A, Requirement b(iii), 9 marks)

Drimpton Co manufactured air conditioning units and was proposing to establish a manufacturing subsidiary in the foreign country of Edricer, within a recently established single market (the CTA). The ESG requirement asked candidates to discuss the ESG issues Drimpton Co faced and recommend actions to overcome them.

1. "Least well attempted part": The examiner stated this was "probably the least well attempted part of this question, and some candidates wrote very little or nothing, perhaps as they were starting to run out of time."
2. Generic content instead of scenario analysis: "Some candidates spent too long describing ESG issues in general and not answering the specific question posed."
3. Mixing issues with actions: "Weaker candidates often presented a general discussion where it was hard to distinguish between what was an issue and what was a recommended action."
4. Impractical wage suggestion: Candidates suggested paying all workers globally the same amount — the examiner explicitly explained why this is impractical (different costs of living across countries).
5. What earned marks: "The better candidates clearly identified and raised an issue and then recommended a suitable action that the company could take to overcome the issue."
6. Commercial acumen opportunity: "Raising an issue that is relevant given the scenario, but which is not mentioned in the question shows good business thinking and will be rewarded, potentially with commercial acumen marks as well as technical marks."

Kampai Co — MJ25 (Section A, Requirement (vi), 7 marks)

Kampai Co was acquiring Skal Co and planned to close a factory that Skal Co had recently established in a less developed area. The factory produced hydrogen-powered vehicles. Negative comments had been made about the proposed closure.

1. Discussing problems instead of solutions: "The biggest failing when answering this question part was that candidates would often discuss issues that would arise due to the negative comments that had been made, rather than describing actions that could be done to address the issue."
2. Missed practical alternatives: "Better candidates were able to use their knowledge to come up with good potential actions" — the examiner specifically praised candidates who suggested the factory could be sold to a third party, sold through a management buy-out (MBO) or management buy-in (MBI), or assessed for financial viability.
3. Ignoring directors' suggestions: "A couple of the directors had suggested that Kampai Co should either not close the factory or not proceed with the acquisition. Too few candidates commented on these suggestions."
4. Accessible even after struggling: "Even candidates who had struggled with the rest of the question were able to make a reasonable attempt at this question part" — confirming that ESG is a mark-recovery opportunity for candidates who may have lost marks on the calculations.

How ESG Modifies Investment Appraisal in AFM

ESG is not a standalone topic in AFM — it's embedded within the major technical areas. In investment appraisal questions (like Drimpton Co), ESG considerations modify the NPV analysis in several concrete ways.

In the Drimpton Co question, the NPV calculation (requirement b(i)) was worth 20 marks, and the ESG discussion (requirement b(iii)) was worth 9 marks. The examiner expected candidates to connect these — for example, noting that the positive NPV might be overstated if environmental costs in Edricer increase over time, or that Drimpton Co's ESG credentials could affect its cost of equity capital.

ESG in Mergers and Acquisitions Questions

The Kampai Co (MJ25) question demonstrated how ESG integrates into M&A scenarios. The company planned to close a target company's factory — a factory producing hydrogen-powered vehicles in a less developed area — creating environmental, social, and governance dimensions simultaneously.

The examiner awarded marks for candidates who suggested selling the factory as a going concern (MBO/MBI), assessing financial viability, and evaluating whether the factory's hydrogen vehicle production could align with Kampai Co's strategy. Candidates who simply listed the negative consequences of the closure without recommending solutions earned minimal marks. For a comprehensive walkthrough of the M&A calculation elements of this question, see our ACCA AFM Business Valuation Methods guide.

Exam Strategy: How to Approach ESG Under Time Pressure

The number one reason candidates underperform on ESG is time management — they spend too long on calculations and run out of time for the discussion. Here is the practical strategy we recommend at Eduyush.

ESG Across ACCA Papers: AFM vs SBL vs SBR

ESG is tested across multiple ACCA Strategic Professional papers, but the approach differs significantly. Understanding these differences prevents you from applying the wrong framework in the wrong exam.

If you're studying AFM alongside SBL, the ESG content reinforces across both papers — but you must adjust your answering approach. In AFM, always connect ESG to the specific financial decision the company is making. In SBL, you can discuss ESG at a more strategic and framework-based level.

Recommended Study Materials

ESG is a topic best prepared through scenario practice — reading alone won't develop the skill of identifying issues and recommending actions under time pressure.

For Indian students pursuing ACCA alongside CA, the ESG content in AFM has growing relevance as Indian corporate governance codes (SEBI BRSR requirements) increasingly align with international ESG frameworks. Big 4 firms (Deloitte, PwC, EY, KPMG) are actively expanding their ESG advisory practices in India, making this knowledge directly transferable to your career in transaction advisory, corporate finance, or sustainability consulting.

For broader AFM exam preparation, see our guides on How to Pass ACCA AFM, Top 10 AFM Mistakes, and ACCA FM Capital Structure Guide (which covers the WACC and cost of equity fundamentals you'll need for investment appraisal).

Ready to master AFM ESG? Browse our ACCA AFM course materials at regional pricing →