With regard to screening, exclusions that are not supported by global consensus are best described as:
Answer(s): B
Screening involves excluding certain investments based on specific criteria. When exclusions are not supported by a global consensus, they are best described as idiosyncratic exclusions.Universal exclusions (A): These are exclusions that are widely accepted and applied globally, such as the exclusion of companies involved in controversial weapons.Idiosyncratic exclusions (B): These exclusions are specific to particular investors or investment strategies and are not based on a global consensus. They reflect the unique values or preferences of the investor or investment mandate.Conduct-related exclusions (C): These are based on a company's behavior or actions, such as violations of human rights or environmental regulations. While these can be idiosyncratic, they are often based on broader accepted standards.
CFA ESG Investing PrinciplesMSCI ESG Ratings Methodology (June 2022)
Pension funds are most likely classified as:
Answer(s): A
Pension funds are typically classified as asset owners.Asset owners (A): Pension funds manage and invest assets on behalf of their beneficiaries. They have significant capital and are responsible for making investment decisions, often delegating management to external asset managers.Fund promoters (B): Fund promoters are entities that market and promote investment funds but do not necessarily own the assets themselves.Asset managers (C): Asset managers are entities that manage investment portfolios on behalf of asset owners. While pension funds may have internal asset management capabilities, they are primarily asset owners.
CFA ESG Investing PrinciplesDefinitions of asset owners, fund promoters, and asset managers in the investment industry
All else equal, a higher discount rate applied to a company's discounted cash flow (DCF) analysis will lead to:
A higher discount rate applied to a company's discounted cash flow (DCF) analysis will lead to a lower estimate of intrinsic value.Higher discount rate: The discount rate is used to calculate the present value of future cash flows. Ahigher discount rate reduces the present value of those cash flows.Intrinsic value: The intrinsic value of a company is the sum of the present values of its expected future cash flows. As the discount rate increases, the present values decrease, resulting in a lower estimate of intrinsic value.
CFA ESG Investing PrinciplesStandard finance and valuation textbooks explaining DCF analysis
Philanthropy is most likely associated with:
Answer(s): C
Philanthropy is most likely associated with corporate social responsibility (CSR).Impact investing (A): Impact investing focuses on generating social or environmental impact alongside financial returns. While philanthropy can be a form of impact investing, it is more commonly linked to CSR.Shareholder engagement (B): This involves shareholders actively engaging with companies to influence their ESG practices. Philanthropy is not a direct form of shareholder engagement.Corporate social responsibility (C): CSR encompasses a company's efforts to contribute positively to society, including philanthropic activities such as donations and community involvement.
CFA ESG Investing PrinciplesDefinitions and distinctions between CSR, impact investing, and shareholder engagement
According to the Global Sustainable Investment Alliance (GSIA), as of 2020, the largest sustainable investment strategy globally is:
According to the Global Sustainable Investment Alliance (GSIA), as of 2020, the largest sustainable investment strategy globally is ESG integration.Definition of ESG Integration: ESG integration involves the systematic and explicit inclusion of environmental, social, and governance (ESG) factors into financial analysis by investment managers.GSIA Reports: The GSIA's Global Sustainable Investment Review highlights that ESG integration has become the dominant strategy among sustainable investment practices. This approach is favored due to its comprehensive consideration of ESG factors in traditional financial analysis.Growth Trends: The increasing awareness of ESG risks and opportunities has driven the growth of ESG integration, making it the largest strategy in terms of assets under management (AUM).CFA ESG Investing
The CFA Institute's resources on ESG integration emphasize the importance and prevalence of this strategy among investors. It outlines how ESG integration helps in identifying material risks and opportunities that could impact financial performance, thus supporting better investment decisions.
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