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

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.

The COVID-19 pandemic led to increased inequality.

Economic Impact: The pandemic exacerbated existing economic inequalities, as lower-income individuals and vulnerable populations were disproportionately affected by job losses, health impacts, and limited access to resources.

Social Disparities: Inequality increased as remote work options were more accessible to higher-income individuals, while essential workers, often from lower-income backgrounds, faced greater health risks.

Global Trends: Reports and studies during and after the pandemic indicated a widening gap between the rich and the poor, highlighting the significant social and economic challenges posed by the crisis.

CFA ESG Investing References:

The CFA Institute’s discussions on the social impacts of the COVID-19 pandemic emphasize the increased inequality as a major consequence, affecting long-term social and economic stability​​​​.

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Screening involves excluding certain investments based on specific criteria. When exclusions are not supported by a global consensus, they are best described as idiosyncratic exclusions.

Universal exclusions (A): These are exclusions that are widely accepted and applied globally, such as the exclusion of companies involved in controversial weapons.

Idiosyncratic exclusions (B): These exclusions are specific to particular investors or investment strategies and are not based on a global consensus. They reflect the unique values or preferences of the investor or investment mandate.

Conduct-related exclusions (C): These are based on a company's behavior or actions, such as violations of human rights or environmental regulations. While these can be idiosyncratic, they are often based on broader accepted standards.

A mature ESG regulatory framework is one where companies are required to either comply with ESG standards or provide explanations for why they have not done so, known as "comply or explain." This approach encourages transparency and accountability while allowing some flexibility for companies based on their specific circumstances.ESG Reference: Chapter 9, Page 499 - Investment Mandates, Portfolio Analytics & Client Reporting in the ESG textbook.

Offshore wind projects are considered clean energy projects and typically qualify as "Green bonds." Green bonds are specifically issued to finance environmentally sustainable projects, particularly those related to renewable energy.ESG Reference: Chapter 7, Page 153 - ESG Analysis, Valuation & Integration in the ESG textbook.

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.

ESG factors affecting balance sheet strength, such as environmental liabilities or governance risks, are particularly material to corporate bond investors. These factors influence a company's ability to meet its debt obligations and, therefore, affect credit risk.ESG Reference: Chapter 7, Page 362 - ESG Analysis, Valuation & Integration in the ESG textbook.

In the European Union, publicly listed firms are required to change their auditors at least every 10 years. This regulation is part of the EU's statutory audit reform, which aims to enhance the independence of auditors and the quality of audits. The rotation requirement is intended toprevent long-term relationships between auditors and clients that could compromise the auditor's objectivity.

Regulatory requirement: The EU Audit Regulation (Regulation (EU) No 537/2014) mandates that public-interest entities, including publicly listed firms, must rotate their statutory auditors or audit firms after a maximum of 10 years.

Objective: This measure is designed to reduce the risk of conflicts of interest and ensure a fresh perspective on the firm's financial statements.

A discretionary ESG investment strategy is characterized by active selection, where the portfolio manager uses bottom-up analysis complemented with ESG factors to make decisions about individual investments. This strategy often leads to a concentrated portfolio because of the selective nature of investment choices. Discretionary ESG strategies differ from index-based or systematic approaches, which are more passive and structured.ESG Reference: Chapter 8, Page 94 - ESG Integrated Portfolio Construction & Management in the ESG textbook.

As policies on ESG issues and financial regulation across countries reach maturity, the least likely occurrence is moving away from “comply and explain” regulation to “comply or explain” regulation.

Current Trend: The current trend in ESG policies and regulations is toward more stringent requirements, often moving from voluntary to mandatory disclosures (A) and from policy formulation to implementation and reporting (B).

Regulatory Frameworks: "Comply or explain" regulation typically requires companies to either comply with the set regulations or explain why they have not done so. This approach is generally seen as a flexible yet accountable method, encouraging adherence to ESG standards while allowing for some flexibility.

“Comply and Explain” Approach: Moving away from “comply and explain” to “comply or explain” would reduce this flexibility. As regulations mature, the trend is towards ensuring more stringent compliance rather than offering more leniency, making it unlikely that there would be a shift away from the more rigorous “comply or explain” approach.

CFA ESG Investing References:

The CFA Institute's discussions on regulatory developments highlight the evolution of ESG regulations towards more accountability and transparency. The trend is towards enhancing compliance mechanisms rather than loosening them​​​​.

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The debate around regulating the social media industry is based on risks associated with big data.

Big data (A): The social media industry collects and processes vast amounts of data from its users. The concerns about privacy, data security, and the use of this data for targeted advertising, misinformation, and other purposes are central to the debate on regulating the industry.

Digital disruption (B): While digital disruption is relevant, it is not the primary focus of the regulatory debate, which is more concerned with the implications of big data.

Embedded systems (C): Embedded systems are more related to hardware and IoT devices, not directly to the core issues in the social media regulatory debate.

Analyzing a portfolio's social impact exposure involves understanding the broader social context before drilling down to individual company specifics. The best approach is to first understand the material social topics at the country and sector levels, then the company level.

Country and sector levels, then the company level (B): Starting at the country level provides insight into the social issues prevalent in the region, influenced by local laws, regulations, and cultural norms. Next, analyzing at the sector level helps to identify sector-specific social risksand opportunities. Finally, understanding these issues at the company level allows for a more detailed analysis of how individual companies manage these social impacts.

Company and country levels, then the sector level (A): This approach might miss out on sector-specific social issues that are critical for a comprehensive analysis.

Company and sector levels, then the country level (C): This approach overlooks the broader country-level social context, which can significantly influence sector and company-level social impacts.

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​​​​.

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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.

Technological innovation, especially concerning big social media companies, has sparked debates around human rights, such as free speech, privacy, and censorship. These issues have created tensions between these companies and sovereign nations, suggesting shifts in societal power.ESG Reference: Chapter 4, Page 192 - Social Factors in the ESG textbook.