QUESTION: 33

Compared to an optimal portfolio that does not have any ESG restrictions a portfolio that optimizes for multiple ESG factors will most likely experience

lower active risk
higher active risk.
lower tracking error

Answer(s): 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.

Reference:

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.

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QUESTION: 34

The Sustamalytics database is most likely used for:

manager ESG assessment
company ESG assessment.
creating an ESG benchmark

Answer(s): B

Explanation:

The Sustainalytics database is primarily used for company ESG assessment. Here's a detailed explanation:

Company ESG Assessment:

Sustainalytics provides detailed ESG ratings and research for individual companies. Their assessments cover various ESG risks and opportunities that companies face, and these ratings are used by investors to evaluate the ESG performance of companies.

The database includes ESG Risk Ratings that measure the degree to which a company's economic value is at risk due to ESG factors. These ratings help investors integrate ESG considerations into their investment processes.

CFA ESG Investing

Reference:

The CFA Institute's ESG curriculum highlights the role of Sustainalytics in providing comprehensive ESG assessments of companies. These assessments are crucial for investors looking to incorporate ESG factors into their investment decisions.

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QUESTION: 35

According to the Capitals Coalition, the stock of renewable and non-renewable natural resources that combine to yield a flow of benefits to people is best described as

nature
natural capital.
ecosystem assets

Answer(s): B

Explanation:

According to the Capitals Coalition, the stock of renewable and non-renewable natural resources that combine to yield a flow of benefits to people is best described as natural capital. Here's a detailed explanation:

Natural Capital:

Natural capital refers to the world's stocks of natural assets including geology, soil, air, water, and all living things. It is from this natural capital that humans derive a wide range of ecosystem services that make human life possible.

The Capitals Coalition defines natural capital as the stock of renewable and non-renewable natural resources (such as plants, animals, air, water, soils, and minerals) that combine to yield a flow of benefits to people.

CFA ESG Investing

Reference:

The CFA Institute's ESG curriculum discusses natural capital extensively, emphasizing its importance in sustainable investing and the need for integrating natural capital considerations into financial decision-making.

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QUESTION: 36

Which of the following technologies is most likely to be viewed by investors as a strategic solution to the decarbonization of high-temperature processes?

Nuclear fusion
Next-generation battery storage
The use of renewable energy to produce hydrogen

Answer(s): C

Explanation:

Investors are most likely to view the use of renewable energy to produce hydrogen as a strategic solution to the decarbonization of high-temperature processes. Here's why:

Renewable Hydrogen:

Hydrogen produced using renewable energy (often referred to as green hydrogen) is seen as a key technology for decarbonizing high-temperature industrial processes. These processes, such as those in steel and cement production, require high levels of heat that are challenging to electrify directly.

Hydrogen can provide the necessary high-temperature heat without the carbon emissions associated with fossil fuels.

Other Technologies:

Nuclear fusion is still in the experimental stage and is not yet a commercially viable solution.

Next-generation battery storage, while important for energy storage and grid stability, does not address the specific challenge of providing high-temperature heat for industrial processes as effectively as hydrogen.

CFA ESG Investing

Reference:

The CFA Institute's ESG curriculum discusses various technologies for decarbonization, highlighting green hydrogen as a promising solution for high-temperature industrial applications due to its potential to reduce emissions significantly.

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QUESTION: 33

Explanation:

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QUESTION: 34

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QUESTION: 35

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QUESTION: 36

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