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

A fund that invests in the best ESG performers across industries uses both positive screening to select companies with strong ESG performance and norms-based screening to ensure they meet international norms and standards. (ESGTextBook[PallasCatFin], Chapter 7, Page 325)

The first formal corporate governance code was the Cadbury Report (1992) in the United Kingdom.

It established principles of good corporate governance, emphasizing board effectiveness, accountability, and audit transparency.

The U.S. Sarbanes-Oxley Act (2002) and Germany’s Corporate Governance Code (2002) came much later.

The Cadbury Report influenced global corporate governance frameworks, including OECD Principles of Corporate Governance and the G20 Corporate Governance Code.

The ocean (Option A) is the largest carbon reservoir, storing about 39,000 gigatons of carbon—far more than forests or the atmosphere. It absorbs:

About 30% of human CO₂ emissions annually, buffering climate change.

Carbon through the biological pump, where plankton absorb CO₂.

Option B (Rainforests) are crucial carbon sinks, but they store significantly less carbon than oceans.

Option C (Atmosphere) holds about 750 gigatons of carbon, much less than the ocean reservoir.

Faith-based Islamic investors follow Shariah principles, which prohibit investments in industries such as gambling, alcohol, and those earning interest (riba). (ESGTextBook[PallasCatFin], Chapter 1, Page 31)

Gender diversity on a company’s board is often seen as an indicator of strong corporate governance, as it promotes diverse perspectives and better decision-making. (ESGTextBook[PallasCatFin], Chapter 5, Page 236)

Investment managers in passive/index tracking strategies (Option C) frequently use proxy voting as a primary tool to influence companies because:

They cannot sell underperforming ESG stocks easily (since they track an index), so they engage through voting and shareholder resolutions.

Major passive fund managers like BlackRock, Vanguard, and State Street use voting to drive ESG changes.

Option A (Real estate) lacks public voting mechanisms—investors engage via direct ownership.

Option B (Private debt) involves debt covenants, not voting rights.

ESG integration is complex because materiality—the relevance of ESG factors—varies by investor type, region, and sector.

Materiality thresholds differ among investors due to varying investment objectives, risk tolerance, and fiduciary duties.

ESG disclosures are not uniform across asset classes—different asset classes (e.g., equities, fixed income, private equity) have distinct disclosure requirements.

Regulatory ESG disclosure requirements differ globally, with frameworks like EU SFDR, SEC climate disclosure rules, and ISSB standards having unique criteria.

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.

Scope 3 emissions (Option C) include indirect emissions from supply chains, investments, and consumer use, making finance and technology sectors particularly exposed because:

Finance: Banks and asset managers finance high-emission industries, leading to significant Scope 3 exposure.

Technology: Cloud computing, data centers, and supply chains generate significant Scope 3 emissions (e.g., electronics manufacturing).

Option A (Scope 1 emissions) refers to direct emissions, which are low for finance and tech.

Option B (Scope 2 emissions) involves purchased electricity, which is relevant but not a major exclusion factor.

Greenwashing—misleading claims about a company's environmental efforts—directly leads to a loss of consumer trust (Option C).

Consumers become skeptical of sustainability claims, leading to brand damage and reduced sales.

Companies caught greenwashing (e.g., Volkswagen Dieselgate, H&M’s false sustainability claims) suffer reputational and financial losses.

Option A (Labor strikes) can occur due to ESG issues, but greenwashing itself does not directly trigger strikes.

Option B (Greater regulation) is a secondary consequence, but the direct impact is consumer trust erosion.

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)

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.

Both statements are accurate. Effective engagement with companies often requires framing the discussion around strategy and long-term performance. Active investment houses are also focusing on integrating stewardship activities with ongoing portfolio management. (ESGTextBook[PallasCatFin], Chapter 6, Page 285)

Social megatrends (Option C) include:

Changing demographics (aging populations, urbanization).

Shifts in family structures (declining birth rates, single-parent households).

Labor market shifts (rise of gig economy, diversity in the workforce).

Option A (Mass migration) is a factor but not the primary social megatrend—it’s more of a geopolitical or economic trend.

Option B (Changes in family structures + mass migration) excludes demographics, which is a core social megatrend.

Including ESG constraints in portfolio optimization models often leads to increased tracking error because the constraints limit the pool of available investments, making it more challenging to match the benchmark exactly. (ESGTextBook[PallasCatFin], Chapter 8, Page 463)