QUESTION: 241

With respect to exclusion policies, which of the following falls outside of the traditional spectrum of responsible investment?

Indices
Listed equities
Corporate debt

Answer(s): A

Explanation:

Exclusion policies are a common practice in responsible investment, typically applied to specific asset classes to avoid investments in sectors or companies that do not meet certain ethical standards. The following are considered in the traditional spectrum of responsible investment:

Indices (A): Indices themselves do not fall within the traditional scope of responsible investment exclusion policies. Indices are benchmarks and can include or exclude companies based on various criteria set by the index provider, but they are not direct investments.

Listed equities (B): Exclusion policies frequently apply to listed equities, where investors choose not to invest in companies involved in activities contrary to their ethical guidelines (e.g., tobacco, firearms).

Corporate debt (C): Similarly, exclusion policies can apply to corporate debt, avoiding bonds issued by companies that do not meet ESG criteria.

Reference:

CFA ESG Investing Principles

MSCI ESG Ratings Methodology (June 2022)

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QUESTION: 242

With regards to the climate, financial materiality:

only considers impacts of a company on the climate
only considers climate-related impacts on a company
considers both impacts of a company on the climate and climate-related impacts on a company

Answer(s): C

Explanation:

Financial materiality in the context of climate change encompasses both the impacts of a company on the climate and the climate-related impacts on a company.

Double Materiality: This concept involves assessing how a company's operations affect the climate (inside-out perspective) and how climate change affects the company's financial performance (outside-in perspective).

Regulatory Frameworks: Many sustainability reporting frameworks, such as the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD), emphasize the importance of understanding both dimensions of climate impact.

Risk and Opportunity Assessment: Considering both perspectives provides a comprehensive view of a company's exposure to climate risks and opportunities, which is crucial for informed decision- making and long-term sustainability.

CFA ESG Investing

Reference:

The CFA Institute's ESG Disclosure Standards highlight the importance of double materiality in evaluating ESG factors. By considering both the impacts of the company on the climate and the climate-related impacts on the company, investors can better understand and manage ESG risks and opportunities.

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QUESTION: 243

Third-party assessments that highlight events, behaviors, and practices that may lead to reputational and business risks and opportunities are best classified as:

advisory services
integrated research
ESG news and controversy alerts

Answer(s): C

Explanation:

Third-party assessments that highlight events, behaviors, and practices that may lead to reputational and business risks and opportunities are best classified as ESG news and controversy alerts.

Purpose of Alerts: ESG news and controversy alerts provide real-time information on incidents that could affect a company's reputation and financial performance. These alerts help investors stay informed about potential risks and opportunities arising from a company's ESG practices.

Types of Information: These alerts often cover a wide range of issues, including environmental incidents, labor disputes, governance failures, and other controversial activities.

Risk Management: By monitoring ESG news and controversies, investors can respond promptly to emerging risks and adjust their investment strategies accordingly.

CFA ESG Investing

Reference:

The CFA Institute's ESG Integration Framework includes the use of third-party ESG news and controversy alerts as a vital tool for monitoring ongoing developments and assessing the potential impact on investment portfolios.

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QUESTION: 244

A challenge to ESG integration at the asset allocation level when using mean-variance optimization is that it:

is highly sensitive to baseline assumptions
requires specialist knowledge to make informed judgments about future risk
could introduce an additional source of estimation errors due to the need for dynamic rebalancing

Answer(s): A

Explanation:

A challenge to ESG integration at the asset allocation level when using mean-variance optimization is that it is highly sensitive to baseline assumptions.

Baseline Assumptions: Mean-variance optimization relies on assumptions about expected returns, volatilities, and correlations among assets. Small changes in these inputs can lead to significantly different asset allocation outcomes.

Estimation Risk: The sensitivity to assumptions increases the risk of estimation errors, which can result in suboptimal asset allocation decisions and increased portfolio risk.

ESG Data Integration: Integrating ESG factors adds another layer of complexity, as ESG data can be inconsistent or incomplete, further complicating the optimization process.

CFA ESG Investing

Reference:

The CFA Institute's materials on portfolio management and asset allocation discuss the challenges of mean-variance optimization, including its sensitivity to baseline assumptions and the difficulties in integrating qualitative ESG data into quantitative models.

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Free ESG-Investing Exam Braindumps (page: 61)

QUESTION: 241

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QUESTION: 242

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QUESTION: 243

Explanation:

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QUESTION: 244

Explanation:

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