QUESTION: 269

As a percentage of the overall materiality threshold reported in enhanced audit reports, performance materiality is typically:

Answer(s): A

Explanation:

As a percentage of the overall materiality threshold reported in enhanced audit reports, performance materiality is typically 50%.

Performance Materiality: Performance materiality is set to reduce the probability that the aggregate of uncorrected and undetected misstatements exceeds the materiality threshold for the financial statements as a whole. It is typically set at a lower level than the overall materiality.

Common Percentage: The standard practice is to set performance materiality at approximately 50%

of the overall materiality threshold. This conservative approach helps ensure that the risk of material misstatements is minimized.

CFA ESG Investing

Reference:

The CFA Institute's materials on audit and assurance practices discuss performance materiality and its role in ensuring the accuracy and reliability of financial reporting. The typical percentage used for performance materiality aligns with industry standards to safeguard against material misstatements.

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QUESTION: 270

Investors in a natural gas power plant identified a material risk that clients will switch to lower greenhouse gas (GHG) energy sources in the future. This risk is best incorporated in the financial modeling of:

revenues
provisions
operating expenditures

Answer(s): A

Explanation:

When investors in a natural gas power plant identify a material risk that clients may switch to lower greenhouse gas (GHG) energy sources in the future, this risk is best incorporated in the financial modeling of revenues.

Revenues (A): Future shifts in client preferences towards lower GHG energy sources would directly impact the revenue stream of the natural gas power plant. A decrease in demand for natural gas- generated power would lead to reduced sales and thus lower revenues. Accurately forecasting revenues under this risk scenario involves projecting reduced income due to potential client attrition and market share loss to more sustainable energy sources.

Provisions (B): Provisions are typically set aside for specific future liabilities or losses, but they are not the primary method for incorporating demand risk due to changing client preferences.

Operating expenditures (C): While operating expenditures might be affected by changes in production volume, the primary impact of clients switching to lower GHG sources would be seen in reduced revenues rather than direct changes to operating costs.

Reference:

CFA ESG Investing Principles

Financial modeling best practices for risk assessment

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QUESTION: 271

Which of the following steps in the ESG rating process is most likely the earliest source of the dispersal of opinions between different ESG rating agencies?

Identification of ESG factors
Determination of weighting and scoring methodologies
Gathering of a set of data points for the identified ESG indicators

Answer(s): A

Explanation:

The earliest source of the dispersal of opinions between different ESG rating agencies is most likely the identification of ESG factors.

Identification of ESG factors (A): Different rating agencies may prioritize and identify different ESG

factors based on their proprietary methodologies, resulting in variation from the outset. This initial step influences the entire rating process as it determines which aspects of ESG will be assessed.

Determination of weighting and scoring methodologies (B): Although critical, discrepancies in weighting and scoring methodologies come after the identification of ESG factors. These methodologies vary based on the initial set of factors considered important by each agency.

Gathering of a set of data points for the identified ESG indicators (C): This step involves data collection based on the previously identified factors and methodologies. Differences in data sources and quality further contribute to variation, but the foundational divergence starts with factor identification.

Reference:

CFA ESG Investing Principles

MSCI ESG Ratings Methodology (June 2022)

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QUESTION: 272

The first step in the effective design of an investment mandate is determining the:

client's ESG investment beliefs
impact of ESG factors on risk and return characteristics
fund manager's investment approach to reflect ESG issues

Answer(s): A

Explanation:

The first step in the effective design of an investment mandate is determining the client's ESG investment beliefs.

Client's ESG investment beliefs (A): Understanding the client's values, preferences, and beliefs regarding ESG factors is essential for creating an investment mandate that aligns with their objectives. This step ensures that the investment strategy and mandate are tailored to the specific ESG priorities of the client.

Impact of ESG factors on risk and return characteristics (B): This step is important for analyzing how ESG factors influence financial performance but comes after understanding the client's ESG beliefs.

Fund manager's investment approach to reflect ESG issues (C): The investment approach should reflect ESG issues identified in alignment with the client's beliefs and priorities, making this a subsequent step in the mandate design process.

Reference:

CFA ESG Investing Principles

Best practices for creating investment mandates

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Free ESG-Investing Exam Braindumps (page: 68)

QUESTION: 269

Explanation:

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QUESTION: 270

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QUESTION: 271

Explanation:

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QUESTION: 272

Explanation:

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