QUESTION: 109

Which of the following transition risks is most likely associated with increased environmental standards?

Legal risks
Policy risks
Technology risks

Answer(s): B

Explanation:

Policy risks are most likely associated with increased environmental standards. Here's a detailed explanation:

Definition of Transition Risks: Transition risks refer to the financial risks that result from the transition to a lower-carbon economy. These can arise from policy changes, legal actions, technology developments, and market shifts.

Policy Risks and Environmental Standards: Policy risks specifically relate to changes in regulations and policies aimed at addressing climate change and environmental issues. Increased environmental standards often involve stricter regulations on emissions, waste management, resource use, and other environmental impacts.

Impact of Policy Risks: Companies may face increased costs of compliance, the need for new investments to meet regulatory requirements, and potential fines or sanctions for non-compliance. These policy changes can significantly affect business operations and financial performance.

Comparison with Other Risks:

Legal Risks: Legal risks involve litigation and legal actions related to environmental damages or failure to comply with environmental laws.
While related, they are distinct from policy risks, which are driven by regulatory changes.

Technology Risks: Technology risks involve the adoption of new technologies and the potential for current technologies to become obsolete.
While technology plays a role in meeting increased environmental standards, policy risks are more directly linked to regulatory changes.

CFA ESG Investing

Reference:

The CFA Institute explains that policy risks are a significant component of transition risks, particularly when governments implement stricter environmental standards to combat climate change (CFA Institute, 2020).

Increased environmental standards often lead to policy risks as companies must adapt to new regulatory landscapes, making it the most relevant type of transition risk in this context.

By understanding these risks and their implications, investors can better manage their portfolios in the face of evolving environmental standards and regulatory changes.

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QUESTION: 110

Which of the following statements about the decoupling of economic activities from resource usage is most accurate?

Moving to a circular economy boosts decoupling
The Jevons paradox explains why decoupling happens
Absolute long-term decoupling is more common than relative decoupling

Answer(s): A

Explanation:

Decoupling refers to the ability of an economy to grow without corresponding increases in environmental pressure. There are two types of decoupling:

Relative decoupling: Resource use grows at a slower rate than economic growth.

Absolute decoupling: Resource use declines while the economy grows.

Moving to a circular economy is a key strategy to enhance decoupling, as it focuses on reusing, recycling, and minimizing waste, thereby reducing the consumption of virgin resources and environmental impact. This approach helps in achieving relative and, in some cases, absolute decoupling.

While the Jevons paradox describes a scenario where increased efficiency leads to increased resource consumption, it does not explain decoupling. Additionally, absolute long-term decoupling is rare compared to relative decoupling, making option A the most accurate statement.

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QUESTION: 111

Which of the following social factors most likely impacts a company's external stakeholders?

Working conditions, health, and safety
Employment standards and labor rights
Product liability and consumer protection

Answer(s): C

Explanation:

Social factors that impact a company's external stakeholders include those that affect customers, local communities, and governments. Product liability and consumer protection directly influence external stakeholders by ensuring the safety, quality, and reliability of products, which in turn affects consumer trust and regulatory compliance. Working conditions, health and safety, and employment standards primarily impact internal stakeholders, such as employees.

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QUESTION: 112

The adoption of ESG investing by retail investors has generally been:

slower than its adoption by institutional investors.
at the same pace as its adoption by institutional investors.
faster than its adoption by institutional investors.

Answer(s): A

Explanation:

The adoption of ESG investing by retail investors has generally been slower than its adoption by institutional investors. Institutional investors have led the way in integrating ESG factors into their investment decisions due to their larger resources and regulatory pressures. In contrast, retail investors have been slower to adopt ESG investing, though interest is growing, especially among younger generations.

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QUESTION: 109

Explanation:

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QUESTION: 110

Explanation:

QUESTION: 111

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QUESTION: 112

Explanation: