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

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.

Credit rating agencies tend to favor companies in regions with high ESG reporting standards (Option C) because:

More disclosure leads to better ESG assessments, reducing uncertainty.

Companies in regions with weaker ESG regulations (e.g., emerging markets) may face higher credit risk due to limited transparency.

Option A is incorrect because ESG factors (e.g., climate risks) can impact liquidity and asset values.

Option B is incorrect because industry weighting in ESG integration follows standard credit risk methodologies.

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.

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)

The scorecard technique relies on company disclosures to assess ESG risks, as these disclosures provide direct information about a company’s practices and performance in relation to ESG criteria. (ESGTextBook[PallasCatFin], Chapter 7, Page 364)

Free allowances in an ETS are often allocated to energy-intensive companies to prevent the offshoring of emissions, also known as "carbon leakage," where companies relocate to jurisdictions with laxer environmental regulations. (ESGTextBook[PallasCatFin], Chapter 3, Page 153)

Engagement (Option B) is the active process of fund managers interacting with investee companies to:

Encourage ESG improvements.

Address material risks impacting long-term value.

Option A (Monitoring) is passive observation, not action.

Option C (Corporate sustainability) applies to company policies, not investor actions.

ESG scorecards are tools that convert subjective ESG assessments into quantitative scores, making them comparable across companies or industries.

Why A (Qualitative → Numerical) is correct:

ESG factors like board diversity, climate policies, and human rights commitments are qualitative, but they are scored numerically to aid investment decision-making.

Example: MSCI, Sustainalytics, and S&P Global use ESG scorecards to rank companies based on policy strength and risk exposure.

Why not B or C?

B is incorrect—quantitative ESG data (e.g., carbon emissions) is already numerical.

C is incorrect—scorecards apply to all ESG factors, not just mandatory ones.

An Emissions Trading System (ETS), also known as a cap-and-trade system, is designed to control and reduce greenhouse gas (GHG) emissions by setting a total emissions cap and allowing participants to trade allowances.

How it works:

A government or regulator sets a cap on total emissions.

Companies receive or buy carbon allowances (permits to emit a certain amount of CO₂).

Companies can trade allowances—if they emit less, they can sell excess permits; if they emit more, they must buy additional permits.

Key examples:

EU Emissions Trading System (EU ETS) (largest globally)

California Cap-and-Trade Program

China’s National Carbon Market (launched in 2021)

Why not A or B?

A is incorrect because an ETS does not directly set a price on carbon—it allows the market to determine the price based on supply and demand.

B is incorrect because an ETS does not involve direct investment in renewable energy (that would be carbon offset programs).

Secondary ESG data refers to information collected from sources other than official company disclosures, often from external third-party sources.

Primary ESG data: Directly provided by companies in sustainability reports, regulatory filings, or financial statements.

Secondary ESG data: Derived from third-party sources such as news articles, employee reviews, external surveys, or social media analysis.

Why is B correct?

Glassdoor employee satisfaction surveys provide insights into workplace culture, labor rights, and social issues—all key ESG aspects.

This is not direct company disclosure but rather third-party, externally collected data.

Why not A or C?

A (Bloomberg ESG Score) is primary data because Bloomberg compiles ESG disclosures directly from companies.

C (Interview transcript with CFO) is primary data because it comes directly from company leadership.

Engagement teams focusing on governance issues are often organized by sector because governance practices and challenges can vary significantly across industries, making a sector-based approach more effective. (ESGTextBook[PallasCatFin], Chapter 6, Page 283)

Engagement (Option B) is a key component of responsible stewardship, with the objective of preserving and enhancing long-term value in investee companies. Investors engage with companies on ESG issues such as climate risk, diversity, and governance to improve performance and reduce long-term risks.

Option A is incorrect because smaller asset owners often rely on collaborative engagement or delegate stewardship activities to investment managers rather than engaging directly.

Option C is incorrect because reactive engagement (triggered by share price declines) is generally less effective than proactive, long-term engagement strategies focused on sustainability improvements.

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.

Externalities are the positive or negative impacts of an asset that are not reflected in its financial costs.

Why A (Impact on the environment) is correct:

Infrastructure assets (e.g., roads, dams, power plants) create environmental and social externalities, such as:

Air pollution from transportation projects.

Habitat destruction from hydroelectric dams.

Noise pollution from airports.

Why not B or C?

B is incorrect—technical issues (e.g., equipment failure) are not classified as externalities.

C is incorrect—externalities originate from the asset itself, not external factors.

Growing income inequality is associated with reduced social mobility (Option A), meaning that individuals from lower-income backgrounds face greater challenges in moving up the economic ladder. This happens because:

Lower-income families often have limited access to quality education, healthcare, and job opportunities, making it harder for individuals to improve their economic status.

Wealth concentration among the elite leads to a decline in broad-based economic opportunity.

More educational opportunities (Option B) is incorrect because education tends to become more expensive and less accessible as income inequality increases.

Higher purchasing power among the middle class (Option C) is incorrect because growing inequality usually means that the middle class shrinks, and wealth is concentrated among the wealthy, reducing overall purchasing power.