QUESTION: 13

Under the disclosure guide for public equities published by the Pension and Lifetime Savings Association (PLSA). fund managers are expected to report on:

ESG integration only.
stewardship activities only.
both ESG integration and stewardship activities

Answer(s): C

Explanation:

Under the disclosure guide for public equities published by the Pension and Lifetime Savings Association (PLSA), fund managers are expected to report on both ESG integration and stewardship activities. Here's a detailed explanation:

ESG Integration:

Fund managers are required to disclose how they integrate ESG factors into their investment processes. This includes the identification and management of ESG risks and opportunities.

They need to provide examples of material ESG factors identified in their analysis, how these factors influence their investment decisions, and how they monitor ESG risks over time .

Stewardship Activities:

Stewardship activities involve how fund managers engage with companies they invest in to promote sustainable business practices and good governance.

This includes voting at shareholder meetings, engaging in dialogue with company management, and participating in collaborative initiatives aimed at improving ESG standards across the industry .

CFA ESG Investing

Reference:

The CFA Institute's ESG curriculum emphasizes the dual role of ESG integration and stewardship in sustainable investing. Both aspects are crucial for ensuring that ESG considerations are fully embedded in the investment process and that fund managers actively contribute to improving corporate practices through engagement and voting .

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QUESTION: 14

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. Here's why:

Baseline Assumptions:

Mean-variance optimization relies on assumptions about expected returns, risks, and correlations among different asset classes. These assumptions are often based on historical data, which may not accurately predict future performance, especially when integrating ESG factors .

Sensitivity:

Small changes in the baseline assumptions can lead to significantly different portfolio allocations. This sensitivity can be problematic when integrating ESG factors, as the data and methodologies for assessing ESG risks and opportunities are still evolving and can introduce additional variability .

Dynamic Rebalancing:

While dynamic rebalancing can introduce estimation errors, the primary challenge remains the sensitivity to initial assumptions. Specialist knowledge is essential for making informed judgments about future risks, but this is secondary to the issue of assumption sensitivity .

CFA ESG Investing

Reference:

The CFA ESG Investing curriculum covers the complexities of integrating ESG factors into asset allocation models, particularly the challenges posed by the sensitivity of mean-variance optimization to baseline assumptions .

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QUESTION: 15

Over the past several years, the proportion of sustainable investing relative to total managed assets has fallen in:

Europe
Canada
the United States

Answer(s): A

Explanation:

Over the past several years, the proportion of sustainable investing relative to total managed assets has fallen in Europe. Here's a detailed explanation:

Stricter Standards:

The decline in Europe's proportion of sustainable investing assets is partly due to the adoption of stricter standards and definitions for sustainable investing. These higher standards have led to a reclassification of assets, resulting in a decrease in the reported proportion of sustainable assets relative to total managed assets .

Comparative Growth:

In contrast, other regions such as Canada and Australia/New Zealand have seen an increase in the proportion of sustainable investing assets. This growth highlights the relative decline in Europe as stricter regulatory frameworks have reshaped the sustainable investing landscape .

CFA ESG Investing

Reference:

The CFA ESG Investing curriculum emphasizes the regional differences in the growth and adoption of sustainable investing practices. Europe's move towards stricter regulations and definitions has impacted the proportion of sustainable assets, a trend well-documented in recent ESG reports and industry analyses .

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QUESTION: 16

Which of the following is a form of individual engagement?

Generic letter
Soliciting support
Informal discussions

Answer(s): C

Explanation:

Individual engagement refers to direct and personal interactions between investors and companies. Informal discussions are a form of individual engagement where investors engage directly with company representatives to discuss specific concerns, insights, or feedback related to ESG issues.

Direct Interaction: Informal discussions involve direct communication between the investor and the company. This can be through meetings, phone calls, or casual conversations, providing a platform for open and candid dialogue.

Specific and Personalized: These discussions are tailored to the specific company and the investor's concerns. Unlike generic letters, which are broad and non-specific, informal discussions allow for detailed and nuanced conversations.

Relationship Building: Informal discussions help build and strengthen relationships between investors and company representatives. This can lead to more effective communication and collaboration on ESG matters.

Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the importance of direct engagement and relationship building in effective ESG integration.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses various forms of engagement, emphasizing the value of personalized and informal interactions.

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QUESTION: 13

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QUESTION: 14

Explanation:

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QUESTION: 15

Explanation:

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QUESTION: 16

Explanation:

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