QUESTION: 229

When screening individual companies, a practice of avoiding the worst ESG performers best defines:

positive screening
negative screening
norms-based screening

Answer(s): B

Explanation:

· Negative Screening Definition:

Negative screening is the practice of excluding companies or sectors that perform poorly on ESG criteria from an investment portfolio.

It focuses on avoiding the worst performers in terms of environmental, social, and governance practices.

· Application in ESG Investing:

Investors use negative screening to mitigate risks associated with poor ESG performance, such as regulatory penalties, reputational damage, and financial losses.

Common exclusions include industries like tobacco, fossil fuels, and weapons manufacturing.

· Comparison with Other Screening Methods:

Positive screening involves selecting the best-performing companies on ESG criteria.

Norms-based screening applies international standards and norms to exclude companies that do not comply.

·

Reference:

The concept of negative screening is detailed in ESG investment frameworks and is widely recognized as a primary method for integrating ESG considerations into investment processes.

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QUESTION: 230

Natural language processing (NLP) is employed as a tool in ESG investing to:

backtest short time series of ESG data
quantify online text relating to ESG risk areas
interpret satellite imagery to assess deforestation

Answer(s): B

Explanation:

· Natural Language Processing (NLP) in ESG Investing:

NLP is a technology used to analyze and interpret large volumes of text data from various sources, including news articles, reports, and social media.

It helps in quantifying and understanding the sentiment and frequency of topics related to ESG risk areas.

· Applications of NLP:

Investors use NLP to process and analyze text data to identify emerging ESG risks, track corporate behavior, and assess public sentiment regarding specific companies or sectors.

NLP can help in creating ESG scores and identifying trends that might not be evident through traditional data analysis.

·

Reference:

The use of NLP in ESG investing is discussed in ESG literature, emphasizing its role in analyzing unstructured data to provide insights into ESG risks and opportunities.

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QUESTION: 231

Which of the following statements about voting is most accurate?

Voting is a necessary but not a sufficient element of good stewardship
Concerns about the diversity of a company's board cannot be reflected in voting decisions
If there are concerns about the financial viability of a business, investors need to pay close attention to voting decisions on the reappointment of members of the audit committee

Answer(s): C

Explanation:

· Importance of Voting in Stewardship:

Voting on resolutions at shareholder meetings is a fundamental aspect of stewardship, enabling investors to influence corporate governance and strategy.

It ensures that management is accountable to shareholders and aligns with long-term interests.

· Focus on Audit Committee:

The audit committee oversees financial reporting and the audit process, which are critical to ensuring the accuracy and reliability of financial statements.

Reappointing members of the audit committee is crucial when there are concerns about a company's financial viability, as this committee plays a key role in maintaining financial integrity.

· Concerns about Board Diversity:

Investors can reflect concerns about board diversity through their voting decisions, particularly during director re-elections.

·

Reference:

The importance of voting, particularly on issues related to financial viability and audit committee reappointments, is emphasized in corporate governance and ESG stewardship guidelines.

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QUESTION: 232

According to the Brunel Asset Management Accord, which of the following is least likely a cause for concern when evaluating an asset manager against an ESG investment mandate?

Change in investment style
Loss of key personnel in the organization
Short term underperformance compared to benchmark

Answer(s): C

Explanation:

When evaluating an asset manager against an ESG investment mandate, several factors can cause concern. According to the Brunel Asset Management Accord, the following points are evaluated for adherence to ESG principles:

Change in investment style (A): A change in investment style can significantly alter the risk and return profile of the portfolio and potentially misalign it with the ESG mandate initially set by the client. This is a critical factor as consistency in investment style ensures that the ESG objectives are continuously met.

Loss of key personnel in the organization (B): Key personnel often drive the ESG integration within investment processes. Their departure could disrupt the consistency and quality of ESG analysis and integration, which is crucial for maintaining the standards of the ESG mandate.

Short term underperformance compared to benchmark (C): Short-term underperformance is not typically a major concern when evaluating an asset manager against an ESG mandate. ESG investing often focuses on long-term outcomes and sustainability. The performance of ESG strategies may fluctuate in the short term due to various factors, including market conditions and the inherent characteristics of ESG investments, which might not always align with short-term market movements. The emphasis is usually placed on long-term performance and the consistency of ESG integration rather than short-term results.

In the context of the Brunel Asset Management Accord and CFA ESG Investing principles, maintaining a long-term perspective and adhering to the agreed-upon ESG criteria are paramount. The primary focus is on the systematic and ongoing application of ESG principles rather than short-term performance metrics.

Reference:

Brunel Asset Management Accord

CFA ESG Investing Principles

MSCI ESG Ratings Methodology (June 2022).

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QUESTION: 229

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QUESTION: 230

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QUESTION: 231

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QUESTION: 232

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