Sustainable-Investing Exam Dumps - CFA Institute Sustainable Investing Certificate Questions and Answers

The OTM’sNatural Capital and Resource Managementsection details how biodiversity loss and deforestation create financial and operational risks. It states:

“Companies with exposure to deforestation in their supply chains—for example, in palm oil, soy, or timber—face cost volatilitydue to regulatory tightening, supply disruption, and reputational backlash.”

It explains that ESG analysis must assess these dependencies because “resource depletion translates directly into margin pressure and long-term profitability risk.” The manual clarifies that the “green economy” involves broader sustainability goals beyond oceans (invalidating B) and that downturns generallyreduce, not increase, resource consumption (contradicting A).

Therefore,option Cis accurate and verified as per the OTM extract.

????Reference:2021-Final-Book.pdf, Chapter 3 — Environmental Factors (Natural Resources, Deforestation, and Biodiversity Risk section).

TheOfficial Training Manual (OTM)highlights the profound social and economic disruption caused by the COVID-19 pandemic, emphasizing its unequal effects across income groups and regions. It states:

“The pandemic exacerbatedexisting inequalitieswithin and between countries, disproportionately affecting low-income households, informal workers, and vulnerable populations.”

It further notes that job losses were concentrated in sectors with high face-to-face contact and limited digitalization, leading to what it calls a “social divergence” between knowledge-based and manual-labor economies. Meanwhile, government interventions such as furloughs and stimulus programs “did not fully offset thestructural widening of inequality.”

Therefore, while offshoring (B) decreased due to supply chain localization, and employment opportunities (C) declined globally, onlyinequality (A)increased. This finding aligns with both ESG social factors and the “S” in ESG, reinforcing the social importance of inclusive recovery measures post-COVID.

????Reference:2021-Final-Book.pdf, Chapter 4 — Social Factors (Global Health Crisis and Inequality section).

The Taskforce on Nature-related Financial Disclosures (TNFD) adopts a definition aligned with theNatural Capital Protocol, describingnatural capitalas the totalstock of natural resources—both renewable and non-renewable—that deliver ecosystem services.

“Natural capital is defined as the stock of renewable and non-renewable natural resources (e.g. plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people.”

This definition clearly supports option C. It reflects how nature contributes economic value to societies and businesses through ecosystem services such as clean air, fertile soil, and water regulation.

Environmental degradation such asdesertificationandwater scarcityis a major driver ofclimate-induced migration. These factors reduce agricultural productivity, cause food insecurity, and make regions uninhabitable.

“Water scarcity and desertification are both drivers of migration as communities seek access to resources and economic opportunities in less-affected regions.”

Both stressors contribute significantly to human displacement, particularly from rural areas in developing countries.

The manual quotes the Accord directly: “Investment performance particularly in the short term will be of limited significance in evaluating the Manager.” It goes on to note that concerns are “much more about culture and a failure to adhere to the expected investment process or style,” and lists issues including “A change in investment style…” and “Organisation instability or the loss of key personnel.”

Conduct-related exclusionsrefer to situations where companies are excluded from investmentbased on specific behaviorsthat are unethical or violate fundamental standards, such as labor rights, corruption, or environmental abuse.

“When evaluating a company for investment, both social risks and the level of mitigation and management should be considered. When such issues persist, a consumer boycott or divestment by investors is possible…”

In this case, thesurveillance of employees to block union formationis a violation of social and labor standards. Divestment due to this conduct qualifies as aconduct-related exclusion.

Discussing French governance, the manual states: “France is the only major market to require two audit firms to look at financial statements rather than the usual one….”

Start-upstypically haveless mature risk management frameworks, including around ESG and supply chain due diligence. However, they often possessgreater agilityandstrategic flexibility, which enables them torespond fasterto market disruptions and innovations compared to larger incumbents.

“Young companies… may lack the robust systems to manage social risks such as labor practices, but they may be more nimble in responding to new business models or technologies introduced by competitors.”

Therefore, the combination ofweaker ESG systemsandgreater responsiveness to disruptionmakes option C the most accurate.

TheOfficial Training Manualdescribes theCorporate Sustainability Reporting Directive (CSRD)as an EU regulation expanding non-financial disclosure requirements to a wider set of companies. It clarifies:

“TheCSRD requires companies to report sustainability information according to EU Sustainability Reporting Standards (ESRS)and allowsself-certification of compliance in specific casesuntil independent assurance becomes mandatory.”

This transitional arrangement permits limitedself-certification, particularly for smaller or newly in-scope entities, prior to third-party audit readiness. The manual distinguishes CSRD from ESRS—CSRD is the legislative directive, whereas ESRS are the technical standards it mandates. Smaller listed entities arenot exemptbut may have delayed timelines.

Thus,option Baccurately captures the current compliance mechanism.

????Reference:2021-Final-Book.pdf, Chapter 9 — Sustainability Regulation and Disclosure Frameworks (Corporate Sustainability Reporting Directive section).

TheGovernance Integrationsection of the OTM outlines several approaches for incorporating ESG insights into valuation and risk analysis. It notes:

“Athreshold assessmentapproach is used when the analyst or manager appliesbasic confidence levelsto valuation estimates, reflecting judgmental thresholds rather than full quantitative integration.”

This method allows a simplified decision framework for governance quality — for instance, adjusting valuation multiples or discount rates modestly when governance practices fall below acceptable thresholds. In contrast, “risk assessment” is broader and more data-driven, while “stewardship dialogue” is an engagement activity, not a valuation technique.

Thus,option Bprecisely describes the practice where governance factors influence valuations through structured, threshold-based confidence judgments.

????Reference:2021-Final-Book.pdf, Chapter 7 — ESG Analysis and Integration (Governance Integration Techniques section).

The Official Training Manual (OTM) explains that investor psychology affects ESG adoption and portfolio decision-making. It references behavioral finance evidence:

“Individual investorsexhibit the strongestloss aversion, tending to overreact to downside risk and short-term volatility. This behavioral bias often leads to under-diversification and lower risk-adjusted returns.”

In contrast, institutional investors such as sovereign wealth funds and foundations usually have structured mandates, longer investment horizons, and lower behavioral biases, making them less loss-averse. The OTM further highlights that individual investors’ sensitivity to short-term losses can influence their ESG preferences — often favoring values-based exclusions rather than long-term integration.

This clear differentiation aligns withoption B, identifying individual investors as the most loss-averse investor group.

????Reference:2021-Final-Book.pdf, Chapter 9 — Investment Mandates, Portfolio Analytics, and Client Reporting (Investor Behaviour and ESG Preferences section).

The Official Training Manual cautions that short sample periods limit robust conclusions for ESG index back-tests: “Although the short times (August 2009 to April 2016) limit the ability to make a strong performance claim across multiple economic cycles….” This highlights thedifficulty of back-testing performance across multiple market cyclesrather than implying a standardized methodology across ESG indices.

The manual also shows a widerange of ESG index methodologies(e.g., FTSE Russell, S&P/DJSI) rather than a single standard, further contradicting option A.

The OTM defines engagement as a cornerstone of active ownership, describing it as:

“A structured process by which investorscommunicate expectations to investee companieson ESG practices and long-term value creation.”

It further notes:

“Engagement helps companiesbetter understand investor expectations and prioritieswhile giving investors insight into corporate governance and risk management practices.”

This explanation precisely reflectsoption A. Conversely, the manual emphasizes that engagement is least effective when a company shows resistance or lacks openness (contradicting option C) and that successful engagement islong-term and relationship-driven, not reactive to short-term price movements (contradicting option B).

Thus, engagement’s primary value lies in facilitating two-way understanding between investors and companies, confirming optionAas correct.

????Reference:2021-Final-Book.pdf, Chapter 6 — Engagement and Stewardship (Purpose and Benefits of Engagement section).

Exclusionary preferencesare investment restrictions based on ethical, moral, or normative criteria, such as avoiding tobacco or weapons companies. These are most commonlyinitiated by asset owners, such as pension funds or sovereign wealth funds, due to their fiduciary or ethical mandates. While some asset managers also apply such screens, they typically do so only when managingcustomized mandatesfor asset owners.

“Exclusionary preferences are most commonly adopted and applied by asset owners rather than asset managers… Asset managers do manage dedicated mandates for asset owners that commonly impose some form of exclusionary screen.”

This is because asset owners are more directly accountable to their beneficiaries, who often hold specific ethical values that need to be reflected in their investments.

The manual’s governance section explains:

“Share-linked incentivessuch as stock options or restricted stock units align management’s interests with those of shareholders over thelong term, whereascash bonuses and salariestend to emphasize short-term performance.”

Thus,option Ccorrectly reflects the compensation form that promotes sustainable firm performance.

????Reference:2021-Final-Book.pdf, Chapter 5, Governance Factors — Executive Remuneration and Incentives.