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Sustainable Investing Certificate(CFA-SIC) Exam Sustainable Investing

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Full version: Sustainable Investing Exam Dumps Questions

1.A company's external auditor formally reports to the:

A. audit committee.
B. chair of the board of directors.
C. shareholders at the annual general meeting.
Answer: A
Explanation:
The external auditor reports to the audit committee, ensuring independence from management and
enhancing the credibility of the financial statements. (ESGTextBook[PallasCatFin], Chapter 5, Page
252)

2.Which of the following corporate governance structures is most common around the world?
A. Joint auditors
B. Single-tier boards
C. Cumulative voting
Answer: B
Explanation:
The single-tier board system (Option B) is the most common governance structure globally,
particularly in the United States, the United Kingdom, and many Commonwealth countries. In this
system, executive and non-executive directors sit on the same board, overseeing management and
strategic decisions.
Joint auditors (Option A) are primarily used in France and India for financial oversight but are not a
standard governance structure.
Cumulative voting (Option C), which allows minority shareholders to have a greater voice in board
elections, is common in some jurisdictions (e.g., the U.S. for shareholder rights protection) but is not a
universal governance structure.
References:
OECD Corporate Governance Principles
World Bank: Corporate Governance Practices by Country
Harvard Law School Forum on Corporate Governance

3.Concerns about the capital structure and financial viability of an investee are most likely reflected in
an active investor's voting decisions in relation to:
A. Share buybacks
B. The auditor's compensation
C. The reelection of non-executive board directors
Answer: A
Explanation:
Share buybacks impact a company’s capital structure, and investors may voteagainst excessive
buybacksif theyweaken financial stability or reduce reinvestment in sustainable growth.
Auditor compensation (B) and board elections (C) are important but do not directly affect capital
structure decisions.
References:
CFA Institute Shareholder Voting & Capital Allocation Guide
MSCI Corporate Governance Reports
Principles for Responsible Investment (PRI) Stewardship Framework

4.Which of the following is most likely a reason for concern regarding the quality of a company's ESG
disclosures?
A. The inclusion of audited ESG data
B. Competitors have stronger disclosure standards
C. There is written commitment to improve future ESG disclosure
Answer: B
Explanation:
One of the main concerns regarding the quality of a company's ESG disclosures is the comparison to
competitors' standards. If a company's competitors have stronger and more transparent disclosure
standards, it can indicate that the company may be lagging in its ESG practices and reporting quality.
This can affect investors' perception of the company's commitment to ESG principles and may
highlight potential risks associated with the company's operations.
According to the CFA ESG Investing curriculum, ESG data can often be incomplete, unaudited, and
incomparable between companies due to different reporting methodologies. The lack of standardized
reporting can make it challenging for investors to assess and compare ESG performance accurately.
References:
"ESG data can be incomplete, unaudited, unavailable, or incomparable between companies due to
different reporting methodologies. This makes assessment of ESG factors impossible in certain
situations".

5.The Principles for Responsible Investment (PRI):

A. Operationalize the Paris Agreement's target for the investment industry.
B. Require members to report annually on their responsible investment practices.
C. Are mandatory and provide overarching guidance on member actions to incorporate ESG issues.
Answer: B
Explanation:
The Principles for Responsible Investment (PRI) is a voluntary initiative supported by the United
Nations, aiming to promote responsible investment practices.
Why B (require annual reporting) is correct:
PRI signatories must report annually on how they implement the six PRI principles.
Reporting covers ESG integration, active ownership, and sustainability risks.
Why not A or C?
A is incorrect?while PRI supports climate action, it does not specifically operationalize the Paris
Agreement for the investment industry.
C is incorrect?PRI is not mandatory, and there are no enforcement mechanisms for non-compliance.
References:
PRI Reporting Framework (2023)
UN PRI’s Principles for Responsible Investment

6.A company's reporting and transparency are initially led by its:

A. Board
B. Audit committee
C. Management team
Answer: C
Explanation:
The management teamis responsible fordeveloping ESG reports, financial disclosures, and corporate
transparency efforts.
The audit committee (B) reviews and ensures compliance with reporting standards.
The board (A) provides oversight but does not directly lead reporting.
References:
CFA Institute Corporate Governance Handbook
Global Reporting Initiative (GRI) ESG Disclosure Guidelines OECD Transparency & Corporate
Reporting Principles

7.Brown divestment:
A. Screens out fossil fuels from portfolios
B. Invests only in companies with a positive environmental impact
C. Involves publicly traded firms exiting polluting businesses by sales to third parties
Answer: C
Explanation:
Brown divestmentrefers topublicly traded firms selling off polluting assets (e.g., coal mines, oil
refineries) to third partiesrather than shutting them down.
Screening out fossil fuels (A) is part of exclusionary ESG investing but does not define brown
divestment.
Investing only in positive-impact firms (B) is more aligned with green or impact investing.
References:
Principles for Responsible Investment (PRI) ESG Divestment Strategies CFA Institute Guide to
Carbon-Intensive Asset Divestment MSCI Research on Brown-to-Green Transition Strategies

8.Which of the following climate risks are systemic risks to the financial system?
A. Policy and legal risks
B. Technology and stability risks
C. Physical and transitional risks
Answer: C
Explanation:
Systemic risks to the financial system from climate change include both physical and transitional
risks. Physical risks refer to the direct impact of climate change, such as extreme weather events and
gradual changes in climate. Transitional risks are associated with the shift to a lower-carboneconomy,
including policy changes, technological advancements, and changing consumer preferences. These
risks are interconnected and can significantly affect economic and financial stability.

9.A challenge to ESG integration for investment managers is the:

A. Narrow range of possible ESG data.
B. Inherently subjective nature of ESG analysis.
C. High correlation among third-party ESG ratings.
Answer: B
Explanation:
One of the biggest challenges in ESG integration is the subjective nature of ESG analysis due to
varying methodologies, inconsistent reporting, and differing interpretations of materiality.
ESG factors are qualitative and require judgment to assess their financial impact.
Different ESG rating agencies (e.g., MSCI, Sustainalytics, Refinitiv) use different scoring models,
leading to low correlation among ESG scores (not high correlation).
There is no single standardized ESG dataset, making it difficult for managers to compare companies
objectively.
References:
MIT Sloan Management Review (2021) on ESG Rating Disparities Harvard Business Review: "Why
ESG Ratings Vary So Much"

10.Alignment of an investment manager's performance against a long-term ESG investor’s objectives

is best achieved by which of the following?
A. Benchmarking against the market
B. Engaging in a monitoring dialogue frequently
C. Early reporting of deviations from the expected investment process or style
Answer: C
Explanation:
Early reporting of deviations from the expected investment process helps ensure that any
misalignment between the manager’s actions and the investor's long-term ESG objectives can be
addressed proactively. (ESGTextBook[PallasCatFin], Chapter 9, Page 518)

11.Which of the following greenhouse gases (GHGs) has the longest lifetime in the atmosphere?
A. Methane
B. Carbon dioxide
C. Fluorinated gas
Answer: C
Explanation:
Among the greenhouse gases (GHGs) listed, fluorinated gases have the longest atmospheric
lifetimes. Here's a detailed breakdown:
Methane (CH4):
Methane is a potent greenhouse gas with a significant impact on global warming. However, its
atmospheric lifetime is relatively short, approximately 12 years.
Carbon Dioxide (CO2):
Carbon dioxide is the most prevalent greenhouse gas emitted by human activities, particularly from
the burning of fossil fuels. CO2 can remain in the atmosphere for hundreds to thousands of years, but
it is still not the longest-lived compared to fluorinated gases.
Fluorinated Gases:
Fluorinated gases, such as hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur
hexafluoride (SF6), are synthetic gases that have extremely long atmospheric lifetimes, often ranging
from a few years to thousands of years. For instance, SF6 can remain in the atmosphere for up to
3,200 years.
These gases are typically used in industrial applications and have a high global warming potential
(GWP) due to their longevity and heat-trapping capabilities.
CFA ESG Investing References:
The CFA Institute’s ESG curriculum emphasizes understanding the different types of greenhouse
gases, their sources, and their impacts on climate change. The curriculum specifically points out the
longevity and high global warming potential of fluorinated gases, which makes them a critical focus in
ESG assessments and climate risk evaluations.

12.Scorecards developed to assess ESG factors:

A. are usually based on third-party research.
B. can be used for both private and public companies.
C. translate numerical scores into qualitative judgments.
Answer: B
Explanation:
ESGscorecardsareflexible toolsused toassess ESG performanceacross bothpublic and private
markets. They help investors identify ESG risks and opportunities regardless of ownership structure.
While third-party data can inform scorecards, in practice they also includeproprietary data and
company-specific engagement outcomes. These scorecards are typically designed to remain
consistent in evaluating performance across different ownership structures.

13.Which of the following statements about potential bias in ESG credit ratings is most accurate?
A. Higher unionization levels in Europe explain sector bias
B. Industry bias stems from rating providers overcomplicating industry weighting and company
alignment
C. Larger companies may obtain higher ratings given the ability to dedicate more resources to
nonfinancial disclosures
Answer: C
Explanation:
CFA materials note thatlarger companies tend to have more resourcesfor detailed ESG reporting,
which caninflate ESG ratingscompared to smaller companies. This is often referred to as areporting
or disclosure biasrather than purely a performance difference. The other statements do not align with
the recognized biases in ESG credit ratings.
14.When screening individual companies, a practice of avoiding the worst ESG performers best
defines:
A. positive screening
B. negative screening
C. norms-based screening
Answer: B
Explanation:
Negative Screening Definition:
Negative screening is the practice of excluding companies or sectors that perform poorly on ESG
criteria from an investment portfolio.
It focuses on avoiding the worst performers in terms of environmental, social, and governance
practices.
Application in ESG Investing:
Investors use negative screening to mitigate risks associated with poor ESG performance, such as
regulatory penalties, reputational damage, and financial losses.
Common exclusions include industries like tobacco, fossil fuels, and weapons manufacturing.
Comparison with Other Screening Methods:
Positive screening involves selecting the best-performing companies on ESG criteria.
Norms-based screening applies international standards and norms to exclude companies that do not
comply.
References:
The concept of negative screening is detailed in ESG investment frameworks and is widely
recognized as a primary method for integrating ESG considerations into investment processes.

15.Avoiding long-term transition risk can most likely be achieved by:

A. investing in companies with stranded assets.
B. divesting highly carbon-intensive investments in the energy sector.
C. reducing exposure to companies exposed to extreme weather events.
Answer: B
Explanation:
Avoiding long-term transition risk involves aligning investment strategies with the anticipated changes
in regulations, market dynamics, and environmental sustainability goals. Transition risk refers to the
financial risks associated with the transition to a low-carbon economy, which can impact the value of
investments, particularly those in carbon-intensive industries.
Understanding Transition Risk: Transition risks are associated with the shift towards a low-carbon
economy. These include changes in policy, technology, and market conditions that can affect the
valuation of carbon-intensive assets.
Divesting Carbon-Intensive Investments: Divesting from highly carbon-intensive investments,
particularly in the energy sector, is a key strategy to mitigate long-term transition risks. Carbon-
intensive investments are likely to be adversely affected by stricter environmental regulations, carbon
pricing, and shifts in consumer preferences towards more sustainable energy sources.
Examples and Case Studies: The urgency to respond to the climate crisis is driving both national and
corporate commitments towards Paris-aligned net-zero carbon emissions targets. Reducing portfolio
concentration in highly carbon-intensive sectors will decrease exposure to long-term transition risks.
However, this may reduce the portfolio's income yield as the energy sector often provides above-
market cash flow profiles and dividend income streams.
Strategic Asset Allocation: Effective asset allocation strategies involve reallocating investments to
sectors with lower carbon footprints and higher resilience to transition risks. This approach ensures
the sustainability of investment returns and aligns with long-term climate goals.
Therefore, the correct approach to avoiding long-term transition risk is divesting highly carbon-
intensive investments in the energy sector.

16.Fund labelers are most likely classified as:

A. regulators
B. fund promoters.
C. financial advisers
Answer: B
Explanation:
Fund labelers are most likely classified as fund promoters. Fund promoters are responsible for
marketing and promoting investment funds, including those with specific labels such as ESG or green
funds.
Marketing Role: Fund promoters play a key role in marketing investment products to potential
investors. They use labels such as ESG, green, or sustainable to attract investors interested in these
themes.
Product Differentiation: By labeling funds with ESG or other sustainable labels, fund promoters
differentiate their products in the market. This helps investors identify funds that align with their values
and investment criteria.
Regulatory Compliance: Fund promoters must ensure that the funds meet the criteria for the labels
they use. This involves compliance with relevant regulations and standards that govern the use of
ESG and other sustainable labels.
References:
MSCI ESG Ratings Methodology (2022) - Discusses the role of fund promoters in marketing and
labeling investment products to attract investors.
ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the importance of accurate labeling
and promotion of ESG funds to ensure transparency and investor trust.

17. Factors Contributing to the Decline: The decline in the US can be attributed to several factors,
including regulatory uncertainties, shifts in investor preferences, and varying definitions and standards
for sustainable investments.

18. Investment-Grade Credit: Investment-grade credit typically involves higher-quality issuers with
better credit ratings and stronger financial stability. These issuers are more likely to integrate ESG
factors into their operations and disclosures, as they often face greater scrutiny from investors and
regulatory bodies. Additionally, ESG integration is more prevalent in investment-grade credit due to
the higher availability of ESG data and metrics for these issuers.

19. ESG Product Options and Scale of Investments:

Consultants and Advisors (Option A): While having multiple ESG product options can be
overwhelming, it is generally not considered a major challenge compared to the fundamental issue of
limited resources.
Scale of Investments (Option C): The scale of investments influencing product offerings is more
relevant to small asset owners. Large asset owners typically have significant influence over fund
managers and product offerings.
References from CFA ESG Investing:
Resource Constraints: The CFA Institute highlights the challenge of resource limitations for asset
owners, emphasizing the need for specialized knowledge and tools to conduct effective ESG
assessments.
ESG Integration Challenges: Understanding the specific challenges faced by asset owners, including
resource constraints, is crucial for developing effective ESG integration strategies.
In conclusion, even large asset owners have limited resources to conduct their own ESG assessment,
making option B the verified answer.

20.Which of the following is a minimum requirement for Principles for Responsible Investment (PRI)
membership?
A. Participation in a shareholder engagement platform
B. The establishment of accountability mechanisms for responsible investment implementation
C. Implementation of Task Force on Climate-Related Financial Disclosures (TCFD) recommendations
Answer: B
Explanation:
PRI’s minimum requirements state that each signatory must haveformal senior-level oversight and
accountability mechanismsin place for responsible investment policies and their implementation. This
requirement ensures governance structures are aligned with ESG commitments.

21.Among ESG data and research providers, traditional providers tend to:
A. Be highly automated.
B. Focus on small and less-covered companies.
C. Have a broader product offering and research focus.
Answer: C
Explanation:
Traditional ESG research providers (Option C) like MSCI, Sustainalytics, and Refinitiv offer:
Comprehensive ESG ratings, data, and analytics.
Coverage of large-cap and mid-cap companies worldwide.
Option A (Highly automated) applies more to alternative providers (e.g., AI-driven ESG analytics).
Option B (Focus on small companies) is incorrect because large ESG providers mostly cover public,
large-cap companies.
References:
PRI ESG Ratings Guide
MSCI ESG Research Methodology
Sustainalytics ESG Risk Ratings Framework

22.A small company based in Sweden operates in an industry that has good sustainability ratings.
The company has a low ESG rating that an analyst believes to be biased. The bias would most likely
result from the company's:
A. industry.
B. company size.
C. geographical base of operations.
Answer: B
Explanation:
Smaller companies often receive lower ESG ratings due to their limited resources for ESG reporting
and engagement, even if their actual practices are sustainable. (ESGTextBook[PallasCatFin],
Chapter 7, Page 364)

23.Investment in fossil fuels is permitted under:

A. The EU Paris-Aligned Benchmarks only
B. The EU Climate Transition Benchmarks only
C. Both the EU Paris-Aligned Benchmarks and the EU Climate Transition Benchmarks
Answer: C
Explanation:
Both the EU Paris-Aligned Benchmarks and the EU Climate Transition Benchmarks allow for limited
investment in fossil fuels. However, these benchmarks include strict criteria to ensure that such
investments contribute to the transition to a low-carbon economy and are aligned with long-term
decarbonization goals. ESG
Reference: Chapter 8, Page 406 - ESG Integrated Portfolio Construction & Management in the ESG
textbook.
Scope 3 carbon emissions, which include indirect emissions throughout the value chain (e.g.,
suppliers and consumers), are accounted for under both the UK Task Force on Climate-related
Financial Disclosures (TCFD) and the European Union’s Sustainable Finance Disclosure Regulation
(SFDR). These frameworks encourage comprehensive reporting of all emissions sources.ESG
Reference: Chapter 3, Page 133 - Environmental Factors in the ESG textbook.
Reporting in the ESG textbook.

24.According to the "Shades of Green" methodology developed by the Center for International
Climate Research (CICERO), which of the following colors best categorizes a green bond that
reduces emissions in the near term without contributing to climate-resilient long-term solutions?
A. Yellow
B. Light Green
C. Medium Green
Answer: B
Explanation:
Light Greenbonds supportshort-term emissions reductionsbut do not contribute significantly tolong-
term climate resilience.
Medium Green (C) supports more sustainable, long-term transitions.
Yellow (A) is not a recognized CICERO category.
References:
CICERO Shades of Green Bond Ratings
Principles for Responsible Investment (PRI) Green Bond Evaluation Framework
Climate Bonds Initiative Green Bond Certification Guide

25.An ESG scorecard for sovereign debt issuers has the following information:
Country 1No carbon policy and high corruption risk
Country 2High-level carbon policy and low corruption risk
Country 3Detailed carbon policy and low corruption risk
Based only on this information, the country with the lowest ESG risk is:
A. Country 1.
B. Country 2
C. Country 3
Answer: C
Explanation:
Based on the provided information, Country 3, with a detailed carbon policy and low corruption risk,
has the lowest ESG risk. Here’s the reasoning:
Carbon Policy and Corruption Risk:
A high-level or detailed carbon policy indicates a strong commitment to addressing climate change,
which reduces environmental risk.
Low corruption risk indicates good governance, which further reduces overall ESG risk.
Therefore, Country 3, which has both a detailed carbon policy and low corruption risk, presents the
lowest ESG risk compared to the others.
CFA ESG Investing References:
The CFA ESG Investing curriculum emphasizes the importance of robust carbon policies and low
corruption risks in assessing the ESG profiles of sovereign debt issuers. Strong environmental and
governance practices are key indicators of low ESG risk.

26.Scores used to construct ESG index benchmarks can be

A. data based, but not rating based
B. rating based, but not data based.
C. both data based and rating based
Answer: C
Explanation:
ESG (Environmental, Social, and Governance) scores used to construct ESG index benchmarks can
be based on both raw data and ratings derived from various data points and methodologies. The
following references from ESG and sustainable investing documents validate this:
Data-based Approach:
ESG ratings incorporate vast amounts of raw data. For instance, MSCI ESG Research collects over
1,000 data points related to ESG policies, programs, and performance, including data on individual
directors and shareholder meeting results spanning up to 20 years.
This raw data is sourced from a variety of inputs including company disclosures (e.g., sustainability
reports, 10-K filings), government databases, and over 3,400 media sources that are monitored daily.
Rating-based Approach:
ESG ratings are not just aggregations of raw data but involve sophisticated methodologies to convert
this data into actionable insights. MSCI ESG Ratings, for example, are assigned on a scale from AAA
to CCC, reflecting the relative ESG performance of companies within their industry.
The process includes assessing exposure metrics (how exposed a company is to material ESG
issues), management metrics (how well a company manages these issues), and continuously
monitoring controversies and events that may impact these ratings.
ESG ratings also involve setting key issue scores and weights, which combine to form an overall ESG
rating relative to industry peers. This integration of various data points and weighted scoring systems
exemplifies the rating-based nature of ESG benchmarks.
By combining both these approaches, ESG index benchmarks ensure a comprehensive assessment
of a company's sustainability performance. The data-based aspect ensures that decisions are
grounded in factual, quantitative information, while the rating-based aspect provides a nuanced,
comparative evaluation of ESG risks and opportunities across companies and industries.
These detailed methodologies align with the CFA ESG Investing standards, which emphasize the
importance of integrating both quantitative data and qualitative assessments in ESG evaluations.
CFA ESG Investing References:
The CFA Institute’s curriculum on ESG Investing highlights the need for both data-based and rating-
based approaches in constructing ESG benchmarks. The CFA ESG Investing Exam Preparation
materials emphasize understanding various ESG data sources, metrics, and the methodologies for
aggregating these into ratings to provide a comprehensive view of a company's ESG performance.
This integrated approach ensures that ES

27.In which of the following countries does the governance code require at least two independent non-
executive directors?
A. Japan
B. The UK
C. South Africa
Answer: A
Explanation:
Japan’sCorporate Governance Code(updated in 2021) requiresat least two independent non-
executive directorson corporate boards. This reflects efforts to enhanceboard independence and
investor protection, especially in companies withhistorically high insider control.
By contrast,UK and South Africangovernance codesrecommendboard independence but do not
mandate a specific number.
References:
Japan Corporate Governance Code (Financial Services Agency, 2021)
UK Corporate Governance Code (FRC)
King IV Report on Corporate Governance (South Africa)

28.All else equal, a higher discount rate applied to a company’s discounted cash flow (DCF) analysis
will lead to:
A. a lower estimate of intrinsic value
B. the same estimate of intrinsic value
C. a higher estimate of intrinsic value
Answer: A
Explanation:
A higher discount rate applied to a company’s discounted cash flow (DCF) analysis will lead to a
lower estimate of intrinsic value.
Higher discount rate: The discount rate is used to calculate the present value of future cash flows. A
higher discount rate reduces the present value of those cash flows.
Intrinsic value: The intrinsic value of a company is the sum of the present values of its expected future
cash flows. As the discount rate increases, the present values decrease, resulting in a lower estimate
of intrinsic value.
References:
CFA ESG Investing Principles
Standard finance and valuation textbooks explaining DCF analysis

29.Which of the following is an advantage of using ESG index-based strategies?

A. Slightly lower fee structures compared to other index-based strategies
B. Lower costs compared to discretionary, actively managed ESG strategies
C. More focused stewardship activities with companies compared to actively managed ESG
strategies
Answer: B
Explanation:
ESG Index-Based Strategies:
ESG index-based strategies offer various advantages, including lower costs compared to
discretionary, actively managed ESG strategies.

30. Climate Change Mitigation: Climate change mitigation refers to efforts to reduce or prevent the
emission of greenhouse gases. Regrowing forests contributes to mitigation by absorbing CO2 from
the atmosphere through the process of photosynthesis, thereby reducing the overall concentration of
greenhouse gases.

31.Which of the following is most likely an example of a negative externality?

A. Impairment costs incurred by a company due to regulatory changes
B. Direct costs incurred by a company in reducing environmental damages
C. Indirect costs incurred by third parties due to environmental damages caused by a company
Answer: C
Explanation:
Negative externalities refer to the adverse effects or costs that are incurred by third parties due to the
actions or activities of a company, without these costs being reflected in the company's financial
statements. These are costs borne by society or the environment rather than the company itself.
Examples include pollution, health costs due to emissions, and environmental degradation.
References:
MSCI ESG Ratings Methodology emphasizes understanding externalities, including environmental
impacts, as significant ESG risks that can translate into financial risks over time.

32.Pension funds are most likely classified as:

A. asset owners
B. fund promoters
C. asset managers
Answer: A
Explanation:
Pension funds are typically classified as asset owners.
Asset owners (A): Pension funds manage and invest assets on behalf of their beneficiaries. They
have significant capital and are responsible for making investment decisions, often delegating
management to external asset managers.
Fund promoters (B): Fund promoters are entities that market and promote investment funds but do
not necessarily own the assets themselves.
Asset managers (C): Asset managers are entities that manage investment portfolios on behalf of
asset owners.
While pension funds may have internal asset management capabilities, they are primarily asset
owners.
References:
CFA ESG Investing Principles
Definitions of asset owners, fund promoters, and asset managers in the investment industry

33.A company has just been assigned a lower ESG risk than its industry peers. Compared to its
current price-to-earnings (P/E), the fair value P/E is most likely:
A. adjusted lower.
B. not adjusted.
C. adjusted higher.
Answer: C
Explanation:
A lower ESG risk profile suggestsbetter risk management and potentially greater resiliencecompared
to peers. This canreduce the risk premiumdemanded by investors andincrease the fair value P/E
ratio. In practical terms, investors may be willing to pay more (higher P/E multiple) for the earnings of
a company perceived to be less exposed to ESG-related risks.

34.Creating long-term stakeholder value by implementing a strategy that focuses on the ethical,
social, environmental, cultural and economic dimensions of doing business is best described as:
A. corporate sustainability.
B. triple bottom line accounting.
C. corporate social responsibility.
Answer: C
Explanation:
Corporate social responsibility (CSR) refers to the practice of businesses engaging in initiatives that
benefit society. The term emphasizes the company's commitment to conduct business in an ethical
manner by considering social, environmental, and economic factors. CSR goes beyond compliance,
encouraging companies to engage in activities that can positively impact their stakeholders.
(ESGTextBook[PallasCatFin], Chapter 1, Page 6)

35.Corporate disclosures in line with the recommendations of the Corporate Sustainability Reporting
Directive (CSRD) are a regulatory requirement for companies in:
A. the EU only
B. the UK only
C. both the EU and the UK
Answer: A
Explanation:
The Corporate Sustainability Reporting Directive (CSRD) is a European Union (EU) directive that
mandates enhanced and standardized sustainability reporting for companies. It aims to improve the
quality and consistency of sustainability information disclosed by companies, which is essential for
investors and other stakeholders to make informed decisions.

36. Role of Credit-Rating Agencies: Credit-rating agencies like Moody's, S&P, and Fitch primarily
provide credit ratings based on financial risk and creditworthiness. However, they have increasingly
incorporated ESG factors into their credit rating processes, offering insights into how ESG issues
might impact credit risk.

37.Information provided by ESG rating agencies is most likely:

A. relatively noisy.
B. subject to "group think.”
C. already reflected in stock prices.
Answer: A
Explanation:
ESG ratings can be noisy due to variations in methodology, data sources, and subjective judgments
by rating agencies, leading to inconsistencies across ratings for the same company.
(ESGTextBook[PallasCatFin], Chapter 7, Page 364)

38.With respect to ESG reporting by investment managers, the 2020 version of the UK Stewardship
Code calls for more reporting on the:
A. outcomes from ESG activity.
B. policies and activities of signatories.
C. assertions of investment managers on ESG themes.
Answer: A
Explanation:
The 2020 version of the UK Stewardship Code emphasizes reporting on the outcomes from ESG
activity, highlighting the practical impact of stewardship efforts rather than just focusing on policies or
intentions. (ESGTextBook[PallasCatFin], Chapter 6, Page 276)

39.Examples of quantitative ESG analysis include:

A. tilting toward certain ESG factors in index-based strategies.
B. analyzing if an issuer’s executive compensation policies are linked to progress on ESG-related
goals.
C. checking that an issuer’s reporting on carbon emissions complies with a broadly accepted
sustainability reporting framework.
Answer: A
Explanation:
CFA guidance notes thatquantitative ESG analysisinvolvesstatistical or numerical methodsto measure
ESG factors?such astilting a portfolio’s weightstoward high-ESG-rated companies in an index
strategy. Options B and C involvequalitative assessments(governance policy linkages and disclosure
compliance), not quantitative measurement of ESG exposures.

40.Single-tier boards are typical in:

A. China
B. The UK
C. Germany
Answer: B
Explanation:
Asingle-tier boardstructure, where executive and non-executive directors sit ononeboard, istypical in
the UKand many othercommon-law jurisdictions.
In contrast, Germany (C) follows atwo-tier board system, which separatesmanagement (executive
board) from oversight (supervisory board). China (A) has a hybrid structure withmandatory
Communist Party oversightin large firms.
References:
UK Corporate Governance Code
German Corporate Governance Code
OECD Principles of Corporate Governance

41.One of the goals of climate change mitigation is to:

A. protect energy and public infrastructure.
B. increase resilience to expected climate events.
C. enable economic development to proceed in a sustainable manner.
Answer: C
Explanation:
Climate change mitigation involves reducing greenhouse gas emissions and fostering economic
development in a way that ensures sustainability for future generations. (ESGTextBook[PallasCatFin],
Chapter 3, Page 153)

42.An ESG scorecard is best categorized as:

A. Purely qualitative analysis
B. Purely quantitative analysis
C. A hybrid of qualitative and quantitative analysis
Answer: C
Explanation:
An ESG scorecard is a hybrid of qualitative and quantitative analysis. It typically combines
quantitative data, such as ESG ratings and key performance indicators (KPIs), with qualitative
assessments, such as management quality and governance practices, to provide a comprehensive
view of a company's ESG performance.ESG
Reference: Chapter 7, Page 368 - ESG Analysis, Valuation & Integration in the ESG textbook.

43.The launch of the European Green Deal in 2020 is intended to:

A. make the European Union climate neutral by 2050.
B. reduce greenhouse gas emissions in the European Union by 55% by 2030.
C. mobilize $372 billion across the European Union of which 30% will contribute to climate objectives.
Answer: A
Explanation:
TheEuropean Green Deal’score ambition is to make the EUclimate neutral by 2050. This overarching
objective shapes its entire policy framework, including emission reduction targets (55% by 2030) and
significant funding allocations, but climate neutrality by 2050 is theultimate goal.

44.With respect to exclusion policies, which of the following falls outside of the traditional spectrum of
responsible investment?
A. Indices
B. Listed equities
C. Corporate debt
Answer: A
Explanation:
Exclusion policies in responsible investment typically focus on specific asset classes, such as listed
equities and corporate debt, where investors can directly apply ethical and ESG criteria to exclude
certain companies or sectors from their portfolios. Indices, however, fall outside of this traditional
spectrum as they represent broader market benchmarks.
Exclusion Policies: These policies are applied to directly exclude investments in certain sectors or
companies that do not meet the ethical or ESG criteria set by the investor. Common exclusions
include tobacco, firearms, and fossil fuels.
Indices: Indices are used to benchmark the performance of portfolios and are typically not subject to
exclusion policies. They represent a broad market or sector and include a range of companies
regardless of their ESG performance. While ESG indices do exist, traditional exclusion policies do not
typically apply to standard market indices.

45.For investments in wastewater treatment plants, a significant obstacle is:

A. loss of jobs.
B. lack of demand.
C. high capital intensity.
Answer: C
Explanation:
Wastewater treatment infrastructurerequireshigh upfront capital investmentfor planning, permitting,
construction, and maintenance. CFA’s sustainable infrastructure modules highlighthigh capital
intensityas a major challenge to financing such projects, despite ongoing demand for clean water
treatment and environmental standards.

46.Which of the following statements about social trends is most accurate?

A. Social trends have similar impacts on different sectors
B. The importance of a social trend for a country is independent of the level of its economic
development
C. The impact of a social trend on companies within the same sector may differ based on each
company's culture
Answer: C
Explanation:
Social trends, such as demographic shifts, diversity and inclusion, or changing consumer behavior,
can impact companies differentlyeven within the same sector. The extent of impact depends
oncorporate culture, business model, and regional market dynamics.
For example, two technology companies may face the same social trend (e.g., remote work demand),
but their responsediffers based on leadership philosophy, operational strategy, and corporate values.
Option A is incorrect because different industries experiencevarying levels of exposureto social
trends. Option B is incorrect because economic development significantly influences how social
trendsmanifest and affectbusinesses.
References:
CFA Institute ESG Integration Guide
World Economic Forum (WEF) Global Risks Report
MSCI ESG Research on Social Trends and Corporate Adaptation

47. Return on Equity Ratio (Option A): The return on equity (ROE) ratio measures a company's
profitability relative to shareholders' equity. While a lawsuit can indirectly affect ROE through legal
expenses and potential losses, the most immediate impact is on liabilities rather than profitability.

48.The Corporate Sustainability Reporting Directive (CSRD):

A. applies to all entities with principal activities in the EU.
B. requires that reported sustainability issues are audited.
C. pre-dates the Non-Financial Reporting Directive (NFRD).
Answer: B
Explanation:
TheCSRDstrengthens and expands the EU’s sustainability disclosure requirements. Key features
include:
Mandatory assurance/audit of sustainability information(option B).
Broader application than NFRD (but doesnot apply to allentities; option A is incorrect).
The CSRDfollowsand replaces the NFRD (not predating it; option C is incorrect).Thus, the correct
focus is therequirement for third-party verificationof sustainability reporting.

49.Compared to an optimal portfolio that does not have any ESG restrictions a portfolio that optimizes
for multiple ESG factors will most likely experience
A. lower active risk
B. higher active risk.
C. lower tracking error
Answer: B
Explanation:
Compared to an optimal portfolio that does not have any ESG restrictions, a portfolio that optimizes
for multiple ESG factors will most likely experience higher active risk. Active risk, also known as
tracking error, measures the deviation of a portfolio’s returns from its benchmark.
Constraints and Limitations: Applying multiple ESG factors imposes constraints on the investment
universe. This limitation can lead to deviations from the benchmark, as the portfolio may exclude
certain stocks or sectors that are present in the benchmark.
Sector and Stock Exclusions: By optimizing for ESG factors, the portfolio may exclude high-
performing stocks or entire sectors that do not meet ESG criteria. This exclusion can increase the
portfolio’s active risk compared to a traditional optimal portfolio.
Potential for Divergence: The focus on ESG factors can lead to a different composition of the portfolio
relative to the benchmark, resulting in potential performance divergence and higher active risk.
References:
MSCI ESG Ratings Methodology (2022) - Highlights the potential for increased active risk when
integrating multiple ESG factors into portfolio optimization.
ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the impact of ESG constraints on
portfolio performance and tracking error.

50.A bond issued to finance construction of a solar farm is an example of a:

A. blue bond
B. green bond
C. transition bond
Answer: B
Explanation:
p 1: Definitions and Concepts
Blue Bond: A bond specifically designed to support marine and ocean-based projects, such as
sustainable fisheries, coral reef restoration, and wastewater treatment to protect water resources.
Green Bond: A bond issued to raise funds for new and existing projects with environmental benefits,
including renewable energy projects like solar farms, wind energy, and other sustainability projects.
Transition Bond: A bond issued to support companies in transitioning their operations towards more
sustainable practices. These bonds often support companies that are moving from high carbon-
intensive activities to lower carbon-intensive practices.
Step 2: Characteristics and Use Cases
Blue Bond: Focuses on aquatic ecosystems.
Green Bond: Focuses on a wide range of environmental projects, including renewable energy, energy
efficiency, sustainable agriculture, and pollution prevention.
Transition Bond: Typically used by companies in carbon-intensive industries to finance their transition
to greener operations.
Step 3: Application to Solar Farm Financing
A bond issued to finance the construction of a solar farm falls under the category of a green bond.
This is because:
Solar farms are renewable energy projects.
Green bonds are specifically designed to fund projects that provide clear environmental benefits.
Step 4: Verification with ESG Investing References
Green bonds are explicitly used to finance projects that have positive environmental impacts, such as
renewable energy projects. As per ESG investing documents: "Green bonds support projects with
environmental benefits, including renewable energy projects such as solar and wind farms".
Conclusion: A bond issued to finance the construction of a solar farm is an example of a green bond
due to its environmental benefits and alignment with sustainable finance principles.

51. Comparative Trends in Europe and Canada:

Europe (Option A): Europe has seen continued growth in sustainable investing, driven by strong
regulatory support and investor demand for ESG-aligned investments.
Canada (Option B): Canada has also experienced growth in sustainable investing, although at a
different pace compared to Europe.
References from CFA ESG Investing:
Regional Trends: The CFA Institute provides insights into the regional differences in sustainable
investing trends, highlighting the decline in the proportion of sustainable investing in the United States
relative to total managed assets.
Market Dynamics: Understanding the market dynamics and regulatory environment is crucial for
interpreting the trends in sustainable investing across different regions.
In conclusion, over the past several years, the proportion of sustainable investing relative to total
managed assets has fallen in the United States, making option C the verified answer.

52.Primary ESG data can be sourced:

A. Only from public documents.
B. Only directly from companies.
C. Both from public documents and directly from companies.
Answer: C
Explanation:
Primary ESG data is obtained from both public documents and direct company disclosures (Option
C), including:
Sustainability reports, financial filings, regulatory disclosures (public documents).
Company surveys, management interviews, direct engagement (company sources).
Option A is incorrect because ESG analysts often require direct engagement to get non-public data.
Option B is incorrect because some ESG data (e.g., emissions data, labor policies) is publicly
disclosed in regulatory filings.
References:
GRI Sustainability Reporting Standards
PRI ESG Data Guide (2022)
CDP Climate and Water Disclosures

53.Among asset owners, which of the following is most likely a challenge to ESG integration?
A. Consultants and retail financial advisors offer too many options for ESG products
B. Even large asset owners have limited resources to conduct their own ESG assessment
C. The scale of investments is not enough to influence the products offered by fund managers
Answer: B
Explanation:
ESG integration presents several challenges for asset owners, including the availability of resources
and expertise required to conduct comprehensive ESG assessments.

54.A governance structure that features non-board members on the nominations committee is most
likely present in:
A. Italy.
B. Sweden.
C. Australia.
Answer: B
Explanation:
Sweden’s governance modelincludesnon-board members(often representatives of major
shareholders) on thenominations committee. This reflects thestakeholder-oriented governance
modelcommon in Nordic countries. In contrast, Italy and Australia tend to have nominations
committees comprised exclusively of board members.

55.In ESG integration, model adjustments are typically performed at the:

A. research stage
B. valuation stage.
C. portfolio construction stage
Answer: B
Explanation:
In ESG integration, model adjustments are typically performed at the valuation stage. This involves
adjusting financial models to reflect ESG risks and opportunities, which can impact revenue forecasts,
operating costs, discount rates, and terminal values. By integrating ESG factors into the valuation
process, investors can better assess the long-term sustainability and financial performance of their
investments.
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56.When constructing net zero portfolios, investors:

A. can follow a clearly accepted standard for netting exposures to carbon risk.
B. typically agree on how to best account for the role that derivatives and shorts play.
C. will tend to have overweight equity allocations in the technology sector if they exclude Scope 3
emissions.
Answer: C
Explanation:
Net zero portfolio construction involves multiple challenges, especially regarding carbon accounting
and Scope 3 emissions (indirect emissions from value chains). The CFA’s sustainable investing
guidance notes there isno universally accepted standardfor carbon risk netting (disproving option A)
andno consensuson how to treat derivatives or short positions (ruling out option B). However, if
investorsexclude Scope 3 emissions (which are significant for heavy industry and energy sectors),
portfolios oftentilt heavily toward lower-carbon, technology-heavy sectors. Thus, technology sector
allocations are typicallyoverweightas a result of this exclusion, making option C correct.

57.The world’s first formal corporate governance code emerged in the:

A. Netherlands.
B. United States.
C. United Kingdom.
Answer: C
Explanation:
TheUnited Kingdomwas the first to introduce a formal corporate governance code, known as
theCadbury Report (1992). This groundbreaking document established best practices for corporate
governance, emphasizing theroles and responsibilities of boards, transparency, and accountability. It
became the model for many global governance frameworks and was a direct response to financial
scandals at the time.

58. Auditor Rotation: EU regulations require that audit firms rotate their auditors after a maximum of
ten years. This is intended to prevent long-term relationships between auditors and clients that could
compromise the independence and objectivity of the audit process.

59.The Kyoto Protocol established emissions targets that are:

A. binding on all countries.
B. voluntary for all countries.
C. binding only on developed countries.
Answer: C
Explanation:
Kyoto Protocol Emissions Targets:
The Kyoto Protocol is an international treaty that commits its Parties to reduce greenhouse gas
emissions, based on the scientific consensus that global warming is occurring and that human-made
CO2 emissions are driving it.

60.When establishing asset allocation strategies, which of the following is the most material ESG
factor for institutional investors?
A. Social
B. Governance
C. Environmental
Answer: C
Explanation:
Institutional investors allocate at scale across sectors and geographies. Among ESG factors:
Governanceis typically institution-wide but shows limited variation across long-term holdings.
Socialissues may be more regional or sector specific.
Environmentalfactors?particularlyclimate risk?have system-wide financial implications, including
stranding risk, regulatory exposure, and transition scenarios. Thus,environmentalfactors are generally
the most material at the strategic allocation level.

61.Which of the following board committees aims to ensure that the board is balanced and effective?
A. Audit committee
B. Compensation committee
C. Corporate governance committee
Answer: C
Explanation:
The Corporate Governance Committee (Option C) ensures the board:
Has diverse, skilled, and independent directors.
Follows best practices in governance, ethics, and oversight.
Option A (Audit committee) focuses on financial reporting and risk management.
Option B (Compensation committee) oversees executive pay and incentives.
References:
OECD Corporate Governance Guidelines
PRI Board Effectiveness and ESG Governance Report
Harvard Law School: Corporate Board Oversight Trends

62.Which of the following is best described as a risk management framework for assessing
environmental and social risk in project finance?
A. The Equator Principles
B. The Helsinki Principles
C. The Net Zero Asset Managers initiative
Answer: A
Explanation:
The Equator Principles are best described as a risk management framework for assessing
environmental and social risk in project finance. They provide a set of guidelines for financial
institutions to ensure that projects they finance are developed in a socially responsible manner and
reflect sound environmental management practices.
Risk Management: The Equator Principles offer a structured approach to identifying, assessing, and
managing environmental and social risks in large-scale project finance. This helps financial
institutions avoid, mitigate, and manage these risks.
Global Standard: Adopted by financial institutions worldwide, the Equator Principles serve as a global
benchmark for project finance, promoting responsible investment and sustainable development.
Application: The principles are applied to projects with significant environmental and social impacts,
including infrastructure, energy, and industrial projects. They cover various aspects such as impact
assessment, stakeholder engagement, and monitoring.
References:
MSCI ESG Ratings Methodology (2022) - Explains the role of the Equator Principles in managing
ESG risks in project finance.

63.A difficulty of integrating ESG into sovereign debt analysis is most likely the:
A. shrinking pool of sovereign investment research available
B. low correlation among credit ratings compared to ESG ratings
C. smaller number of issuers compared to corporate debt or equities
Answer: C
Explanation:
Integrating ESG factors into sovereign debt analysis involves assessing the environmental, social,
and governance characteristics of countries issuing debt. This presents unique challenges compared
to corporate debt or equities.
Step 2: Key Challenges
Shrinking Pool of Sovereign Investment Research: While research availability may vary, it is not the
primary difficulty.
Low Correlation among Credit Ratings vs. ESG Ratings: This is a concern but not the most significant
challenge.
Smaller Number of Issuers: The sovereign debt market has fewer issuers compared to the corporate
debt or equity markets, which limits diversification and makes it harder to compare and assess ESG
factors comprehensively.
Step 3: Verification with ESG Investing References
The smaller number of sovereign issuers compared to corporate debt or equities makes it challenging
to integrate ESG factors due to limited diversification opportunities and comparable data: "The
sovereign debt market has a limited number of issuers, making it difficult to apply the same level of
ESG integration as seen in corporate debt and equity markets".
Conclusion: A difficulty of integrating ESG into sovereign debt analysis is the smaller number of
issuers compared to corporate debt or equities.

64. Joint Auditors and Double Voting Rights:

Joint Auditors: The requirement for joint auditors is more common in other jurisdictions, such as
France, rather than in the UK.
Double Voting Rights: Double voting rights for some shareholders are not a feature of UK corporate
governance but can be found in other markets, like France, where long-term shareholders may be
granted additional voting rights as an incentive for loyalty.
References from CFA ESG Investing:
UK Corporate Governance Code: The CFA Institute highlights the importance of the UK Corporate
Governance Code, which includes detailed guidelines on board behavior to ensure that directors fulfill
their duties effectively and ethically.
Board Responsibilities: The UK Corporate Governance Code emphasizes the need for boards to
maintain high standards of conduct, accountability, and governance practices, reflecting the
prominence of board behavior guidelines.

65. Scope 3 Emissions: Scope 3 emissions include all indirect emissions that occur in a company's
value chain, such as emissions from purchased goods and services, business travel, and waste
disposal. While important, focusing solely on Scope 3 emissions does not provide a complete picture
of a company's overall emission reduction strategy.

66.For a board to be successful, the most important type of diversity relates to:
A. Race.
B. Gender.
C. Thought.
Answer: C
Explanation:
While race and gender diversity are critical components of a well-functioning board, diversity of
thought is the most important in ensuring effective decision-making, reducing groupthink, and
improving governance.
Diversity of thought arises from board members with different backgrounds, professional experiences,
and viewpoints, leading to better risk management and innovation.
Research (e.g., McKinsey's "Diversity Wins" 2020 report) indicates that companies with diverse
perspectives outperform their peers financially and strategically.
Regulatory bodies and institutional investors (such as MSCI and ISS) increasingly assess cognitive
and experiential diversity rather than just demographic diversity.
References:
McKinsey & Company, "Diversity Wins" (2020)
Harvard Law School Forum on Corporate Governance, "The Impact of Board Diversity on
Governance" (2022)

67.The potential impacts of climate risk on asset allocation strategies are:

A. local but not systemic.
B. systemic but not local.
C. both local and systemic.
Answer: C
Explanation:
Climate risks have both local and systemic impacts on asset allocation. Local risks pertain to specific
regions or industries, while systemic risks can affect the entire financial system due to the global
nature of climate change. (ESGTextBook[PallasCatFin], Chapter 3, Page 139)

68.The launch of the European Green Deal in 2020 is intended to:

A. Make the European Union climate neutral by 2050.
B. Reduce greenhouse gas emissions in the European Union by 55% by 2030.
C. Mobilize 372 billion across the European Union, of which 30% will contribute to climate objectives.
Answer: A
Explanation:
The European Green Deal’s primary goal is to make the EU climate neutral by 2050 (Option A),
meaning:
Net-zero greenhouse gas emissions by 2050.
Massive investment in renewable energy and clean technology.
Option B (55% emission reduction by 2030) is an intermediate milestone, not the main goal. Option C
(372 billion mobilization) refers to the EU Recovery Plan but is not the core objective. References:
European Commission: The European Green Deal (2020)
EU Climate Law & Fit for 55 Package
PRI Overview of EU Green Finance Policies

69.With regards to the climate, financial materiality:

A. only considers impacts of a company on the climate
B. only considers climate-related impacts on a company
C. considers both impacts of a company on the climate and climate-related impacts on a company
Answer: C
Explanation:
Financial materiality in the context of climate change encompasses both the impacts of a company on
the climate and the climate-related impacts on a company.
Double Materiality: This concept involves assessing how a company’s operations affect the climate
(inside-out perspective) and how climate change affects the company's financial performance (outside-
in perspective).
Regulatory Frameworks: Many sustainability reporting frameworks, such as the Global Reporting
Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD), emphasize the
importance of understanding both dimensions of climate impact.
Risk and Opportunity Assessment: Considering both perspectives provides a comprehensive view of
a company's exposure to climate risks and opportunities, which is crucial for informed decision-
making and long-term sustainability.
CFA ESG Investing References:
The CFA Institute’s ESG Disclosure Standards highlight the importance of double materiality in
evaluating ESG factors. By considering both the impacts of the company on the climate and the
climate-related impacts on the company, investors can better understand and manage ESG risks and
opportunities.

70.Article 6 of the Sustainable Finance Disclosure Regulation (SFDR) in the EU covers financial
products that:
A. have sustainable investment as an objective.
B. claim to promote environmental and social characteristics.
C. are not promoted as incorporating any ESG factors or objectives.
Answer: C
Explanation:
Under the SFDR,Article 6applies tofinancial products that do not integrate sustainability
considerationsinto their investment decisions. These products are not marketed as having any ESG
objectives or characteristics. In contrast,Article 8covers products that promote environmental or social
characteristics, andArticle 9covers those with explicit sustainable investment objectives.

71.Which of the following principles is most likely understated in stewardship codes drafted by the
fund management industry? The principle requiring investors to:
A. regularly monitor investee companies.
B. have a public policy regarding stewardship.
C. manage their conflicts of interest regarding stewardship matters.
Answer: C
Explanation:
Stewardship codes drafted by fund managers typically emphasizemonitoringandpublic policy
commitmentsbut oftenunderstate the importance of managing conflicts of interest. Conflicts of interest
can arise when asset managers act on behalf of different clients with potentially conflicting priorities,
making explicit policies and governance structures for handling these conflicts crucial to effective
stewardship.

72.According to Mercer Consulting, which of the following asset classes has the highest availability of
sustainability-themed strategies compared to its asset-class universe?
A. Real estate
B. Private debt
C. Infrastructure
Answer: C
Explanation:
Mercer's Findings:
Mercer Consulting's research indicates that infrastructure has a high availability of sustainability-
themed strategies. This is due to the inherent characteristics of infrastructure projects, which often
involve long-term, tangible assets that can integrate sustainable practices.
Mercer highlights that infrastructure investments are well-suited for sustainability themes due to their
potential to contribute to societal goals such as renewable energy, sustainable transportation, and
green buildings.
ESG Integration in Infrastructure:
Infrastructure projects provide ample opportunities for ESG integration, from the development phase
through to operations and maintenance. These projects can significantly impact environmental and
social outcomes, making them a focal point for sustainability-themed strategies.
The CFA Institute notes that infrastructure investments can drive positive ESG outcomes, such as
reducing carbon emissions, improving energy efficiency, and enhancing community resilience.
Investor Demand:
There is growing investor demand for sustainability-themed infrastructure investments as they seek to
align their portfolios with long-term ESG goals. This demand drives the development and availability
of ESG-focused investment strategies in the infrastructure sector.
Mercer reports that the high demand for sustainable infrastructure projects is reflected in the
increasing number of investment products and funds dedicated to this asset class.
Case Studies and Examples:
Examples of sustainability-themed infrastructure investments include renewable energy projects (e.g.,
wind and solar farms), sustainable transport systems (e.g., electric vehicle infrastructure), and green
buildings that meet high environmental standards.
The CFA Institute provides case studies demonstrating how infrastructure projects can achieve
significant ESG impacts, contributing to both financial returns and societal benefits.
References:
Mercer Consulting's report on ESG integration and availability of sustainability-themed strategies by
asset class.
CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment
Professionals."

73.Which of the following statements about the Green Claims Directive (GCD) is most accurate? The
GCD:
A. applies to mandatory green claims made by businesses towards consumers
B. aims to make green claims reliable, comparable, and verifiable across the world.
C. requires verification by independent auditors before green claims can be made and marketed
Answer: B
Explanation:
The Green Claims Directive (GCD) aims to make green claims reliable, comparable, and verifiable
across the world. This directive addresses the need for consistency and transparency in the way
businesses communicate their environmental claims to consumers.
Reliability: The GCD ensures that green claims made by businesses are based on accurate and
substantiated information, preventing misleading claims.
Comparability: By standardizing the criteria and methodologies for green claims, the GCD enables
consumers to compare the environmental benefits of different products and services effectively.
Verifiability: The directive requires that green claims be verifiable, meaning that businesses must
provide evidence and undergo scrutiny to support their claims, enhancing trust and accountability.
References:
MSCI ESG Ratings Methodology (2022) - Discusses the importance of reliability, comparability, and
verifiability in ESG disclosures and claims.
ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the role of regulatory frameworks like
the GCD in ensuring transparent and trustworthy green claims.

74.According to the "Shades of Green" methodology developed by the Center for International
Climate Research (CICERO), which of the following best categorizes a green bond where accurate
assessment of the contribution of the project or solution to a low-carbon, climate-resilient future is not
possible with the information available?
A. Yellow.
B. Light Green.
C. Medium Green.
Answer: A
Explanation:
Under the CICERO "Shades of Green" framework, a Yellow rating (Option A) indicates:
Lack of sufficient data to determine climate impact.
Potential misalignment with long-term sustainability goals.
Option B (Light Green) means the project supports climate-friendly solutions but is not
transformational.
Option C (Medium Green) means the project is aligned with long-term climate goals but has areas for
improvement.
References:
CICERO Shades of Green Methodology
ICMA Green Bond Principles
PRI Guide on Green Bond Assessments

75. Country-Level Assessments: Scorecards can also be adapted for country-level assessments of
sovereign bonds, although this is less common. They can include criteria relevant to the ESG
performance of countries, such as governance quality, environmental policies, and social indicators.
References from CFA ESG Investing:
ESG Scorecards: The CFA Institute highlights the use of ESG scorecards as a practical tool for
investors to conduct their own assessments when external ESG ratings or research are not available.
This enables a more tailored and flexible approach to ESG integration.
Applicability and Flexibility: The CFA curriculum discusses the versatility of scorecards in evaluating
both corporate and sovereign issuers, underscoring their utility in various contexts.
In conclusion, scorecards for ESG analysis are most likely used when third-party research or scores
are not available, making option B the verified answer.

76.According to the Stockholm Resilience Centre (2023), which of the following planetary boundaries
has already been crossed as a result of human activity?
A. Freshwater use
B. Ocean acidification
C. Stratospheric ozone depletion
Answer: A
Explanation:
TheStockholm Resilience Centreidentifiesfreshwater useas one of theplanetary boundaries that has
already been exceeded, threateningecosystems and biodiversity. Overuse of water resourcesdisrupts
natural cyclesand leads todesertification and water scarcity.
Ocean acidification (B) is increasing but has not yetfully crossed the boundary, while ozone depletion
(C) has beenpartially reversed due to global policy efforts (e.g., the Montreal Protocol).
References:
Stockholm Resilience Centre Report on Planetary Boundaries (2023)
UN Water Crisis Report
IPCC Climate Change & Water Scarcity Reports

77. Scope and Applicability: The CSRD applies to a wide range of companies within the EU, including
large companies, listed companies, and certain small and medium-sized enterprises (SMEs). It does
not extend to the UK, which has its own regulatory framework for corporate sustainability reporting
following Brexit.
References from CFA ESG Investing:
CSRD Overview: The CFA Institute outlines the scope and requirements of the CSRD, emphasizing
its role in enhancing corporate sustainability disclosures within the EU.
EU vs. UK Regulations: The distinction between EU and UK regulations is crucial, as post-Brexit, the
UK follows different guidelines for corporate sustainability reporting.
In conclusion, corporate disclosures in line with the recommendations of the CSRD are a regulatory
requirement for companies in the EU only, making option A the verified answer.

78.Which of the following best summarizes the studies on carbon risk?

A. Companies with lower levels of CO2 emissions are associated with higher returns
B. Companies with higher levels of CO2 emissions are associated with higher returns
C. There is no conclusive evidence on the link between a company's level of CO2 emissions and
returns
Answer: C
Explanation:
Studies on carbon risk have not provided conclusive evidence linking a company's level of CO2
emissions directly to financial returns. While some studies suggest that companies with lower
emissions may be better positioned for long-term success due to regulatory and market shifts, other
research indicates that the relationship is complex and influenced by various factors. Therefore, it is
not universally accepted that lower emissions consistently correlate with higher returns, nor that
higher emissions necessarily lead to higher returns.
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79.ESG factors can affect credit risk at:

A. Issuer level only.
B. Industry level only.
C. Both issuer level and industry level.
Answer: C
Explanation:
ESG factors can impact credit risk at both issuer and industry levels by influencing financial stability,
regulatory compliance, and reputational risks.
Issuer level: A company's ESG risk exposure (e.g., environmental violations, governance scandals)
can lead to downgrades or higher borrowing costs.
Industry level: Sectors like coal mining, oil & gas, and tobacco face systemic ESG risks (e.g., climate
regulations, social opposition).
Credit rating agencies (e.g., Moody’s, S&P, Fitch) integrate ESG risks into credit assessments.
References:
S&P Global’s ESG & Credit Ratings Framework
Moody’s ESG Risk Assessment Reports

80.Which of the following is most likely a direct impact of the tighter regulation of pollution on a
company’s financial performance?
A. Higher provisions only
B. Lower financing costs only
C. Both higher provisions and lower financing costs
Answer: A
Explanation:
Tighter pollution regulations typically lead to higher provisions, as companies must allocate more
resources to comply with environmental laws and manage potential liabilities. Lower financing costs
may be a long-term benefit but are not an immediate impact of increased regulation.ESG
Reference: Chapter 3, Page 148 - Environmental Factors in the ESG textbook.

81.With respect to ESG integration, adjusting financial model inputs based on an evaluation of a
company’s ESG risk factors is an example of a:
A. hybrid approach
B. qualitative approach.
C. quantitative approach
Answer: C
Explanation:
Adjusting financial model inputs based on an evaluation of a company’s ESG risk factors is an
example of a quantitative approach. Here’s why:
Quantitative Approach:
This involves the use of numerical data and mathematical models to assess ESG risks and
incorporate them into financial models. Adjusting financial inputs like revenue forecasts, cost
projections, or discount rates based on ESG factors quantifies the impact of these factors on financial
performance.
By integrating ESG risk factors into financial metrics, investors can better understand the potential
financial implications of ESG issues and make more informed investment decisions.
Qualitative vs. Hybrid Approaches:
A qualitative approach relies more on subjective judgment and narrative assessments, such as
analyst opinions or case studies, without necessarily converting these insights into numerical data.
A hybrid approach combines both qualitative and quantitative methods, using narrative assessments
alongside numerical data. However, directly adjusting financial model inputs is a clear application of
quantitative analysis.
CFA ESG Investing References:
The CFA Institute’s ESG curriculum emphasizes the importance of integrating ESG factors into
financial models quantitatively to provide a comprehensive view of a company’s financial health and
potential risks.

82.Which of the following is a success factor characteristic of investor collaboration? Investors should
have:
A. an engagement approach that is bespoke to the target company.
B. clear leadership with appropriate relationships, skills, and knowledge.
C. objectives that are linked to material strategic and governance issues.
Answer: B
Explanation:
Effective investor collaboration is crucial for achieving meaningful outcomes in ESG engagements
and initiatives. Clear leadership with appropriate relationships, skills, and knowledge is a key
characteristic of successful investor collaboration.

83.One of the mam principles of stewardship codes calls for institutional investors to:
A. regularly monitor investee companies
B. avoid considering conflicts of interest regarding stewardship matters.
C. act independently of other investors when escalating stewardship activity
Answer: A
Explanation:
Principle of Monitoring:
Regular monitoring of investee companies is a fundamental principle in stewardship codes, ensuring
that institutional investors remain informed about the companies in which they invest and can
effectively engage with them on ESG and performance issues.
According to the CFA Institute, continuous monitoring allows investors to identify potential risks and
opportunities, engage with company management, and advocate for improvements in governance
and practices.
Stewardship Codes:
Stewardship codes, such as the UK Stewardship Code and the International Corporate Governance
Network (ICGN) Global Stewardship Principles, emphasize the importance of regular monitoring as
part of responsible investment practices.
The CFA Institute highlights that these codes provide frameworks and guidelines for institutional
investors to follow, promoting transparency, accountability, and proactive engagement with investee
companies.
Engagement and Escalation:
Regular monitoring enables investors to engage with companies on a continuous basis, addressing
issues as they arise and escalating concerns if necessary. This ongoing engagement is crucial for
effective stewardship and long-term value creation.
The Principles for Responsible Investment (PRI) also advocate for regular monitoring and
engagement, encouraging investors to take an active role in improving corporate behavior and
sustainability practices.
Examples of Monitoring Activities:
Monitoring activities include reviewing financial statements, ESG reports, meeting with company
management, and participating in shareholder meetings. These activities help investors stay informed
and influence corporate strategies and practices.
The CFA Institute notes that effective monitoring involves a comprehensive approach, integrating
financial analysis with ESG considerations to provide a holistic view of investee companies.
References:
CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment
Professionals."
UK Stewardship Code and ICGN Global Stewardship Principles documents, which outline the
principles of regular monitoring and engagement.

84.At the portfolio level, ESG integration will most likely consider:
A. Credit analysis.
B. Risk management measures.
C. Ownership and stewardship activities.
Answer: B
Explanation:
ESG integration at the portfolio level focuses on risk management to protect and enhance financial
returns.
Why B (Risk management measures) is correct:
ESG integration aims to reduce exposure to financially material ESG risks (e.g., climate risk,
governance failures).
Portfolio managers use ESG data to assess company-specific and systemic risks.
Why not A or C?
A (Credit analysis) applies more to fixed-income investing.
C (Ownership & stewardship) relates to active engagement rather than ESG risk integration.
References:
PRI’s Guide to ESG Integration at the Portfolio Level (2023)

85.In contrast to engagement, monitoring is more likely to result in:

A. changed company behaviors.
B. a two-way sharing of perspectives.
C. efficient capital allocation by investors.
Answer: C
Explanation:
Monitoring focuses on tracking a company’s performance and ensuring that the investment aligns
with ESG objectives, leading to more efficient capital allocation based on data-driven insights.
(ESGTextBook [PallasCatFin], Chapter 6, Page 283)

86.Formal corporate governance codes are most likely to

A. be found in all major world markets
B. call for serious consequences for non-comphant organizations.
C. be interpreted by proxy advisory firms when corporate compliance is assessed
Answer: A
Explanation:
Formal corporate governance codes are most likely to be found in all major world markets. These
codes provide a framework for best practices in corporate governance and are widely adopted to
enhance transparency, accountability, and investor confidence.
Global Adoption: Major markets around the world have established formal corporate governance
codes to guide companies in implementing effective governance practices. These codes are often
developed by regulatory bodies, stock exchanges, or industry associations.
Standardization of Practices: Corporate governance codes help standardize governance practices
across markets, making it easier for investors to assess and compare companies. They cover key
areas such as board composition, executive remuneration, and shareholder rights.
Regulatory Compliance: Compliance with governance codes is often mandatory or strongly
encouraged, with companies required to disclose their adherence to these standards. This promotes
consistency and enhances the integrity of the market.
References:
MSCI ESG Ratings Methodology (2022) - Highlights the presence of formal corporate governance
codes in major markets and their role in standardizing practices.
ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the global adoption of governance
codes and their impact on corporate transparency and accountability.

87.According to the International Corporate Governance Network (ICGN) Model Mandate:

A. Disclosure of voting activity is sufficient to satisfy the requirement of engagement disclosure.
B. An investment manager should disclose an assessment of ESG risks that are embedded in the
portfolio.
C. An investment manager should disclose the long-term secular trends and themes that have
influenced portfolio construction.
Answer: B
Explanation:
The ICGN Model Mandate provides guidelines for institutional investors on governance, ESG
integration, and stewardship practices.
Why B (Disclose ESG risks in portfolios) is correct:
The ICGN Model Mandate states that investment managers should assess and disclose ESG risks
that affect their portfolios.
This ensures transparency and helps asset owners understand risk exposures.
Why not A or C?
A is incorrect?disclosing voting activity alone does not fulfill the full engagement disclosure
requirement. C is incorrect?while long-term themes are relevant, ESG risk assessment is a more
explicit requirement. References:
ICGN Model Mandate Guidance (2023)
Global Stewardship Principles (ICGN 2022 Update)

88.Poor corporate governance in the form of weak accountability and alignment increases the risk of
value erosion for:
A. Public finance initiatives only
B. Private equity investments only
C. Both public finance initiatives and private equity investments
Answer: C
Explanation:
Weak governance increases risk inboth public finance initiatives and private equity investments:
Public finance initiatives(e.g., government-backed projects) can suffer fromcorruption,
mismanagement, and inefficient resource allocation.
Private equity investmentscan lose value due topoor board oversight, conflicts of interest, or
misaligned executive compensation.
References:
OECD Corporate Governance Risk Report
CFA Institute ESG Risk in Private Equity Guide
Principles for Responsible Investment (PRI) Governance & Investment Risks

89.When aligning investments with client ESG beliefs, which of the following ESG considerations
should be reflected in the investment mandate dimension of the investment process?
A. Material ESG factors
B. Rationale for ESG integration
C. Consideration of ESG factors, including prioritization
Answer: C
Explanation:
Investment mandates should reflectboth ESG factors and their prioritization, ensuring alignment
withclient beliefs, risk tolerance, and sustainability goals.
Materiality alone (A) is not enough, andrationale (B) is part of the process but not the defining
criterionfor structuring investment mandates.
References:
Principles for Responsible Investment (PRI) ESG Investment Mandates Guide
CFA Institute ESG Investment Governance Framework
Morningstar ESG Portfolio Integration Report

90. Board Behavior Guidelines: The UK Corporate Governance Code places a strong emphasis on
board behavior, setting out clear guidelines for the roles and responsibilities of directors. These
guidelines aim to ensure that boards act in the best interests of the company and its stakeholders,
promoting transparency, accountability, and ethical behavior.

91.The UK's Green Finance Strategy identifies the policy lever of greening finance as:
A. strengthening the role of the UK financial sector in driving green finance.
B. directing private sector financial flows to economic activities that support an environmentally
sustainable and resilient growth.
C. ensuring that the financial sector systematically considers environmental and climate factors in its
lending and investment activities.
Answer: C
Explanation:
The UK's Green Finance Strategy emphasizes the importance of ensuring that environmental and
climate factors are systematically considered in financial decisions, including lending and investment
activities. (ESGTextBook[PallasCatFin], Chapter 3, Page 153)

92.Which of the following best characterizes a climate mitigation strategy rather than a climate
adaptation strategy?
A. Developing drought-resilient crops
B. Implementing carbon reduction policies
C. Planning more efficiently for scarce water resources
Answer: B
Explanation:
Climate mitigation strategies focus on reducing the causes of climate change, such as implementing
carbon reduction policies to lower greenhouse gas emissions. In contrast, adaptation strategies
involve adjusting to the effects of climate change, like developing drought-resistant crops.ESG
Reference: Chapter 3, Page 114 - Environmental Factors in the ESG textbook.

93.According to a study by Berg, Koelbel, and Rigobon, the correlation of ESG ratings is:
A. High, and this can be a source of insight for investors
B. Low, and this poses a challenge for empirical research
C. Low, and this motivates companies to improve their ESG performance
Answer: B
Explanation:
Berg, Koelbel, and Rigobon (2022) found thatESG ratings from different providers (e.g., MSCI,
Sustainalytics, FTSE) have low correlation, makingcomparisons difficult. This inconsistencyhinders
empirical researchandleads to investor confusion.
References:
Berg, Koelbel & Rigobon (2022) “Aggregate Confusion: The Divergence of ESG Ratings”
MSCI vs. Sustainalytics ESG Ratings Methodology Comparison
CFA Institute ESG Data Inconsistency Report

94.Which of the three ESG factors is most often taken into consideration by traditional investment
analysts?
A. Social
B. Governance
C. Environmental
Answer: B
Explanation:
Traditional investment analysts most often take into consideration governance factors among the
three ESG factors. Governance factors are typically viewed as critical to the operational and financial
stability of a company.
Corporate Governance: Governance factors include the structures and processes for the direction
and control of companies, such as board composition, executive compensation, audit practices, and
shareholder rights. These elements are directly linked to a company's accountability and integrity.
Risk Management: Effective governance practices help mitigate risks related to fraud,
mismanagement, and regulatory non-compliance. Analysts focus on governance to ensure that the
company is managed in a way that protects shareholders' interests and enhances long-term value.
Performance Indicators: Strong governance is often correlated with better financial performance and
reduced volatility. Companies with robust governance structures are perceived as more reliable and
are thus more attractive to traditional investment analysts.
References:
MSCI ESG Ratings Methodology (2022) - Highlights the importance of governance factors in
traditional financial analysis and their impact on company performance.
ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the emphasis on governance factors
by investment analysts due to their direct link to corporate stability and performance.

95.Which of the following best supports a company’s claim to a commitment to internal social
factors?
A. It supports freedom of association through a pro-union stance
B. It incurs increased costs to avoid sourcing raw materials from a conflict zone
C. It was the first in its industry to incorporate fire-resistant materials in its products
Answer: A
Explanation:
Supportingfreedom of association(option A) reflects acore labor rights issueand is a
fundamentalinternal social factor?it directly involves how the company treats and empowers its own
workforce. In contrast, avoiding conflict-zone sourcing (B) is anexternal supply chain
risk(environmental and social), and product fire-resistance (C) is aproduct safety measurerather than
a direct internal social practice.

96.Determining which ESG issues are material:

A. involves judgment.
B. excludes impacts on short-term financial performance.
C. is a process that is independent of a company’s industry and business model.
Answer: A
Explanation:
Determining material ESG issues involves significant judgment based on the company’s industry,
business model, and specific risk factors. This process helps to focus on the most relevant ESG
considerations. (ESGTextBook[PallasCatFin], Chapter 7, Page 325)

97.In ESG integration, which of the following best describes a data-informed analytical opinion
designed to support investment decision-making?
A. ESG screening
B. Integrated research
C. Voting and governance advice
Answer: B
Explanation:
Integrated Research: This involves combining ESG data with traditional financial analysis to form
comprehensive insights that support investment decisions. Integrated research considers both
qualitative and quantitative ESG factors and their potential impact on financial performance.
Purpose: The goal of integrated research is to provide a nuanced, data-informed perspective that
helps investors identify risks and opportunities associated with ESG issues, thereby enhancing the
decision-making process.
ESG Screening and Voting Advice: ESG screening (A) is the process of filtering investments based
on ESG criteria, and voting and governance advice (C) involves guidance on shareholder voting and
governance practices. While these are important, they do not encompass the full scope of analytical
opinion provided by integrated research.
CFA ESG Investing References:
The CFA Institute’s ESG Integration Framework emphasizes the role of integrated research in
incorporating ESG factors into investment analysis, providing a holistic view that informs better
investment decisions.

98.An advantage of the carbon footprinting approach to environmental risk analysis is that it allows
for:
A. comparisons to global benchmarks.
B. measuring and valuing nature's role in decision-making.
C. measuring potential investment risks related to the physical impacts of climate change.
Answer: A
Explanation:
Carbon footprinting allows investors and companies to compare their emissions to global
benchmarks, providing a standard metric for measuring environmental performance and identifying
areas for improvement. (ESGTextBook[PallasCatFin], Chapter 3, Page 139)

99.Which of the following is most likely a success factor characteristic of the engagement approach?
Investors pursuing the engagement should have:
A. Meaningful assets under management.
B. A prior relationship with the target company.
C. An objective that is specific and targeted to enable clarity around delivery.
Answer: C
Explanation:
For engagement to be effective, it must have clear, specific, and measurable objectives (Option C).
Investors should establish well-defined ESG goals, such as reducing carbon emissions by 20% over
five years or improving board diversity to at least 30% women. This ensures that engagement efforts
can be tracked and measured for success.
Option A is incorrect because while larger investors have more influence, small investors can engage
effectively through collaboration (e.g., Climate Action 100+).
Option B is incorrect because prior relationships with companies can be helpful but are not essential
for engagement success.
References:
PRI Guide on ESG Engagement Best Practices
Climate Action 100+ Progress Reports
OECD Principles on Shareholder Engagement

100.According to the Sustainability Accounting Standards Board (SASB), GHG emission is material
for more than 50% of the industries in which sector?
A. Health care
B. Technology and communications
C. Extractives and minerals processing
Answer: C
Explanation:
According to the Sustainability Accounting Standards Board (SASB), greenhouse gas (GHG)
emissions are material for more than 50% of industries in the extractives and minerals processing
sector. This sector's activities are closely associated with significant GHG emissions due to the nature
of resource extraction and processing operations, making GHG management a critical aspect of their
environmental performance.
Top of Form
Bottom of Form
101.Under which perspective did the Freshfields Report argue that integrating ESG considerations
was necessary in all jurisdictions?
A. Economic
B. Fiduciary duty
C. Impact and ethics
Answer: B
Explanation:
The Freshfields Report argued that integrating ESG considerations is necessary from a fiduciary duty
perspective, as failure to consider material ESG risks can undermine long-term financial performance.
(ESGTextBook[PallasCatFin], Chapter 5, Page 236)

102.Scorecards for ESG analysis are most likely:

A. applicable to public companies but not private companies.
B. used when third-party research or scores are not available.
C. inappropriate for country-level assessments of sovereign bonds.
Answer: B
Explanation:
ESG Analysis Scorecards:
Scorecards for ESG analysis are tools used by investors to evaluate and compare the ESG
performance of companies, particularly when third-party research or scores are not available.

103.Which of the following environmental factors for infrastructure projects is most difficult to
quantify?
A. Solid waste
B. Water pollution
C. Biodiversity and habitat
Answer: C
Explanation:
Biodiversity and habitat lossarethe most difficult environmental factors to quantifybecause they
involvecomplex ecological interactions, long-term impacts, and regional variations.
Solid waste (A)andwater pollution (B)haveclearer measurement metrics, such as waste tonnage and
pollutant concentrations.
References:
World Bank Environmental Impact Assessment Guidelines
UN Biodiversity & Ecosystem Impact Report
CFA Institute ESG Infrastructure Risk Framework

104.The triple bottom line accounting theory considers people, profit, and:
A. planet
B. efficiency.
C. licence to operate
Answer: A
Explanation:
The triple bottom line accounting theory considers people, profit, and planet. This framework expands
the traditional financial bottom line to include social and environmental dimensions, emphasizing
sustainable and responsible business practices.
People: This dimension focuses on the social aspects of business, including employee welfare,
community engagement, and human rights. It assesses the impact of business activities on
stakeholders and society at large.
Profit: The profit dimension includes the traditional financial performance of the business. It measures
the economic value generated by the company and its contribution to shareholders and the economy.
Planet: The planet dimension addresses the environmental impact of business operations. It
considers factors such as resource use, waste management, carbon emissions, and overall
environmental sustainability.
References:
MSCI ESG Ratings Methodology (2022) - Explains the principles of the triple bottom line and its
importance in comprehensive ESG assessment.
ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the integration of social, economic,
and environmental factors in sustainable business practices.

105.Suppose the average price-to-earnings (P/E) ratio for the financial industry is 10x. A financial
institution with high ESG risk compared to its industry, is most likely assigned a fair value P/E ratio:
A. lower than 10x
B. of 10x
C. higher than 10x
Answer: A
Explanation:
Price-to-Earnings (P/E) Ratio and ESG Risk:
The price-to-earnings (P/E) ratio is a valuation metric used to assess the relative value of a
company's shares. A company with higher ESG risks is generally perceived as having higher
operational and financial risks, which can negatively impact its valuation.

106.According to the Principles for Responsible Investment (PRI), which of the following ESG
engagement dynamics most likely create value?
A. Social, political, and learning
B. Communicative, political, and learning
C. Governance, communicative, and political
Answer: B
Explanation:
According to PRI, engagement that includes communicative, political, and learning dynamics is likely
to create value. Effective ESG engagement often involves open communication, addressing political
contexts, and ensuring continuous learning from engagement experiences. This helps align
stakeholders and companies towards sustainable practices.ESG
Reference: Chapter 6, Page 285 - Engagement and Stewardship in the ESG textbook.

107.The role of auditors is to assess the financial reports prepared by management and to provide
assurance that:
A. the numbers are correct
B. there is no fraud within the business.
C. the reports fairly represent the performance and position of the business
Answer: C
Explanation:
The role of auditors is to assess the financial reports prepared by management and to provide
assurance that the reports fairly represent the performance and position of the business. Auditors do
not guarantee that the numbers are correct or that there is no fraud; rather, they provide an opinion
on the overall fairness and accuracy of the financial statements.
Audit Opinion: Auditors provide an independent opinion on whether the financial statements are
presented fairly, in all material respects, in accordance with the applicable financial reporting
framework.
Reasonable Assurance: Auditors aim to obtain reasonable assurance that the financial statements
are free from material misstatement, whether due to fraud or error. This involves evaluating the
appropriateness of accounting policies and the reasonableness of significant estimates made by
management.
Stakeholder Confidence: By providing assurance on the fairness of financial reports, auditors
enhance the confidence of stakeholders, including investors, creditors, and regulators, in the financial
information provided by the company.
References:
MSCI ESG Ratings Methodology (2022) - Discusses the role of auditors in providing assurance on
financial statements and enhancing stakeholder trust.
ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the importance of auditors in ensuring
the fair representation of a company's financial performance and position.

108.Which of the following statements about the materiality of social factors is most accurate?
A. Population aging is more important to emerging markets than developed markets
B. The importance of a specific social issue depends on the regional or country context
C. The difference between rural and urban areas is greater in the developed world than in emerging
markets
Answer: B
Explanation:
The importance of a specific social issue often depends on the regional or country context. For
example, population aging might be more relevant in developed markets, while labor rights may be
more critical in emerging markets. Social factors are highly context-dependent and vary significantly
across different regions and sectors.ESG
Reference: Chapter 4, Page 192 - Social Factors in the ESG textbook.

109.Integrating the impact of material ESG factors into traditional financial analysis for a company
with strong ESG practices most likely.
A. leads to a lower estimate of intrinsic value
B. has no impact on intrinsic value
C. leads to a higher estimate of intrinsic value
Answer: C
Explanation:
Integrating the impact of material ESG factors into traditional financial analysis for a company with
strong ESG practices most likely leads to a higher estimate of intrinsic value.
Risk Mitigation: Companies with strong ESG practices are often better at managing risks related to
environmental, social, and governance factors. This risk mitigation can lead to more stable and
predictable cash flows, positively impacting the intrinsic value.
Operational Efficiency: Strong ESG practices can lead to improved operational efficiency, cost
savings, and higher profitability. For example, energy-efficient processes and waste reduction can
lower operating costs, enhancing financial performance.
Market Perception and Access to Capital: Companies with robust ESG practices may benefit from a
better market perception and easier access to capital at lower costs. Investors are increasingly
prioritizing ESG factors, which can lead to a higher valuation for companies perceived as ESG
leaders.
References:
MSCI ESG Ratings Methodology (2022) - Highlights how strong ESG practices can enhance a
company’s intrinsic value by reducing risks and improving operational performance.
ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the positive impact of integrating ESG
factors on a company’s financial analysis and valuation.
110.Which of the following investor types most likely prefers exclusions as an ESG approach?
A. Life insurers
B. Foundations
C. General insurers
Answer: B
Explanation:
Step 1: Understanding ESG Approaches
ESG approaches include exclusions, where certain investments are excluded from a portfolio based
on ethical, moral, or ESG criteria.
Step 2: Investor Types and ESG Preferences
Life Insurers: Focus more on long-term liabilities and often integrate ESG factors without strict
exclusions.
Foundations: Tend to have strong ethical and mission-driven mandates, leading them to prefer
exclusions to ensure investments align with their values.
General Insurers: Similar to life insurers, they may integrate ESG factors but do not typically rely on
exclusions as their primary approach.
Step 3: Verification with ESG Investing References
Foundations are mission-driven and often prefer exclusions to ensure their investments align with
their ethical and social objectives: "Foundations are more likely to adopt exclusionary approaches to
ensure their investments reflect their mission and ethical values".
Conclusion: Foundations most likely prefer exclusions as an ESG approach.

111.A credit investor uses fundamental credit measures and sector-specific ESG indicators to
evaluate a beverage company. Water is a key input for the ingredients used in the company's
products.
For the investor, the company's efforts to ensure a steady supply of water would most likely be
considered:
A. A credit strength only.
B. An ESG strength only.
C. Both a credit strength and an ESG strength.
Answer: C
Explanation:
A company's water management efforts are both a credit strength and an ESG strength (Option C)
because:
Credit strength: A stable water supply reduces operational risks, improving financial resilience.
ESG strength: Water sustainability aligns with environmental responsibility, reducing risks of
regulatory fines or reputational damage.
Option A (Credit strength only) ignores the environmental and social benefits.
Option B (ESG strength only) overlooks the financial stability aspect.
References:
PRI ESG Integration in Credit Analysis Report
Moody’s Water Risk in Corporate Credit Analysis
Sustainalytics Water Management ESG Ratings

112. UK Stewardship Code Principles: The UK Stewardship Code outlines several principles for
institutional investors, including monitoring investee companies, managing conflicts of interest, and
reporting on stewardship and voting activities.

113.According to the Global Sustainable Investment Alliance (GSIA), as of 2020, the largest
sustainable investment strategy globally is:
A. ESG integration
B. exclusionary screening
C. corporate engagement and shareholder action
Answer: A
Explanation:
According to the Global Sustainable Investment Alliance (GSIA), as of 2020, the largest sustainable
investment strategy globally is ESG integration.
Definition of ESG Integration: ESG integration involves the systematic and explicit inclusion of
environmental, social, and governance (ESG) factors into financial analysis by investment managers.
GSIA Reports: The GSIA’s Global Sustainable Investment Review highlights that ESG integration
has become the dominant strategy among sustainable investment practices. This approach is favored
due to its comprehensive consideration of ESG factors in traditional financial analysis.
Growth Trends: The increasing awareness of ESG risks and opportunities has driven the growth of
ESG integration, making it the largest strategy in terms of assets under management (AUM).
CFA ESG Investing References:
The CFA Institute’s resources on ESG integration emphasize the importance and prevalence of this
strategy among investors. It outlines how ESG integration helps in identifying material risks and
opportunities that could impact financial performance, thus supporting better investment decisions.

114.In the investment management industry, triple bottom line accounting theory:
A. replaces a broader framework of sustainability.
B. complements a broader framework of sustainability.
C. has been replaced by a broader framework of sustainability.
Answer: B
Explanation:
Triple Bottom Line Accounting Theory:
Triple Bottom Line (TBL) accounting theory expands the traditional reporting framework to include
ecological and social performance in addition to financial performance. This approach was introduced
by John Elkington in 1994 to measure the sustainability and societal impact of an organization.

115. Other Engagement Actions:

Meeting with Investor Relations Team (Option A): This is a routine engagement action where
investors seek information and dialogue but do not exert significant pressure.
Engaging Management through Operational Site Visit (Option B): While visiting operational sites and
engaging management is important, it is generally seen as part of regular due diligence rather than an
escalation of engagement.
References from CFA ESG Investing:
Escalation Strategies: The CFA Institute outlines various engagement and escalation strategies used
by investors to influence corporate behavior. Submitting resolutions and speaking at general meetings
are highlighted as more assertive actions taken when initial engagement efforts do not yield the
desired results.

116.The correlation between country ESG scores and credit ratings is:
A. Relatively low.
B. Close to zero.
C. Relatively high.
Answer: C
Explanation:
There is a relatively high correlation (Option C) between sovereign ESG scores and credit ratings
because:
Countries with strong governance, environmental policies, and social stability tend to have higher
credit ratings.
Weak ESG performance (e.g., corruption, political instability, climate risk) negatively affects sovereign
creditworthiness.
Option A (Relatively low) is incorrect because major rating agencies (S&P, Moody’s, Fitch) integrate
ESG factors into sovereign risk assessments.
Option B (Close to zero) is incorrect because ESG factors are material financial risks in sovereign
credit ratings.
References:
Moody’s ESG Sovereign Credit Risk Report
S&P Global: ESG and Sovereign Credit Ratings
IMF: ESG Risks in Government Bonds

117.Compared to those of other countries, the UK corporate governance code has a more in-depth
focus on:
A. Board structure
B. Voting procedures
C. Board behaviors and corporate culture
Answer: C
Explanation:
TheUK Corporate Governance Codeemphasizesboard behaviors and corporate culture, focusing
onaccountability, ethical leadership, and long-term value creation.
Board structure (A) and voting procedures (B) are important but not the primary emphasis of the UK
code.
References:
UK Corporate Governance Code (Financial Reporting Council)
OECD Corporate Culture & Governance Report
CFA Institute Board Effectiveness Framework

118.Which of the following is most likely categorized as an external social factor?

A. Human rights
B. Product liability
C. Working conditions
Answer: A
Explanation:
Human rights are most likely categorized as an external social factor.
Human rights (A): Human rights issues pertain to the broader societal impacts and obligations of
companies towards external stakeholders, including communities and individuals affected by the
company's operations. These are external social factors because they involve the company’s
interaction with the society at large.
Product liability (B): Product liability is typically considered an external factor but is more related to
legal and regulatory compliance rather than social factors.
Working conditions (C): Working conditions are internal social factors as they pertain to the
company's treatment of its employees and the internal work environment.
References:
CFA ESG Investing Principles
MSCI ESG Ratings Methodology (June 2022)
119.Which of the following statements regarding the impact of social issues on potential investment
opportunities is most accurate?
A. Social trends impact sectors differently.
B. Companies within a sector are exposed to social factors in the same way.
C. Analyzing which social topics are material from an investment point of view starts with
understanding materiality at the company level.
Answer: A
Explanation:
Social issues impact different sectors uniquely, affecting investment risks and opportunities.
Why A is correct:
Examples of sector-specific social risks:
Retail & Apparel # Supply chain labor conditions, human rights.
Tech Industry # Data privacy, employee diversity.
Healthcare # Access to medicine, ethical drug pricing.
Why not B?
B is incorrect because not all companies in a sector face the same social risks?for example, some
may have stronger supply chain policies than others.
Why not C?
C is incorrect because social materiality often starts at an industry level first, then narrows down to
the company level.
References:
SASB (Sustainability Accounting Standards Board) Materiality Framework
World Economic Forum: Social Risks in Sustainable Investing (2022)

120.According to the fundamental conventions of the International Labour Organization (ILO), which
of the following should not be supported as a labor right by companies?
A. Forced labor
B. Minimum age
C. Freedom of association
Answer: A
Explanation:
TheInternational Labour Organization (ILO)identifiesforced laboras aviolation of fundamental labor
rights.
Companies mustnot support or engage in forced laboras per theILO’s core labor standards.
Freedom of association (C)is aprotected labor rightunder ILO conventions.
Minimum age (B)is covered underILO child labor laws, setting a minimum legal working age.
References:
ILO Core Conventions on Labor Rights
United Nations Guiding Principles on Business & Human Rights
OECD Responsible Business Conduct Guidelines

121.Which of the following ESG screening methodologies is most likely to result in a well-diversified
portfolio?
A. a relative basis only
B. an absolute basis only
C. both a relative basis and an absolute basis
Answer: C
Explanation:
Screening on both a relative basis and an absolute basis is most likely to result in a well-diversified
portfolio.
 Relative Screening: This involves comparing companies within the same industry or sector to identify
the top or bottom performers based on ESG criteria. It ensures that the portfolio maintains exposure
to various industries.
Absolute Screening: This sets fixed thresholds for ESG criteria that companies must meet to be
included in the portfolio, regardless of their industry. It ensures that the portfolio includes only
companies that meet a certain standard of ESG performance.
Diversification: Combining both methods allows for a broader and more balanced approach to ESG
integration, ensuring that the portfolio is diversified across sectors while maintaining high ESG
standards.
CFA ESG Investing References:
The CFA Institute’s ESG Investing materials emphasize the benefits of using both relative and
absolute screening to achieve a well-diversified portfolio that aligns with ESG objectives. This
combined approach helps in capturing a wide range of high-performing ESG companies across
different industries.

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