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Free ESG-Investing Exam Braindumps (page: 54)

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PDF with 468 Questions

When using a threshold assessment to integrate governance factors into the investment decision- making process, fund managers most likely focus on the:

  1. cost of capital
  2. quality of management
  3. level of confidence about future earnings

Answer(s): B

Explanation:

A threshold assessment involves setting minimum criteria that companies must meet to be considered for investment. This often includes governance factors which are critical for evaluating the leadership and management effectiveness of a company.

Step 2: Focus Areas in Governance Assessment

Cost of Capital: More related to financial metrics and not directly linked to governance assessments.

Quality of Management: A key governance factor, assessing the capabilities, track record, and integrity of a company's management team.

Level of Confidence about Future Earnings: While important, it is more related to financial forecasting than to governance assessments.

Step 3: Verification with ESG Investing Reference

Governance assessments in ESG investing place significant emphasis on evaluating the quality of management. This includes leadership practices, board effectiveness, executive compensation, and overall management competence: "Quality of management is a crucial aspect in governance assessments, determining the strategic direction and risk management practices of a company".

Conclusion: When using a threshold assessment to integrate governance factors, fund managers most likely focus on the quality of management.



Working conditions on a tree plantation are most likely an example of a(n):

  1. social issue
  2. governance issue
  3. environmental issue

Answer(s): A

Explanation:

Step 1: Categorizing ESG Issues

Social Issues: Relate to human rights, labor practices, working conditions, and community relations.

Governance Issues: Involve the structure and oversight of a company's operations, including board practices and executive compensation.

Environmental Issues: Concern the impact of a company's activities on the natural environment, such as pollution and resource use.

Step 2: Application to Working Conditions

Working conditions on a tree plantation involve aspects like labor rights, worker safety, fair wages,

and overall treatment of employees, which fall under social issues.

Step 3: Verification with ESG Investing Reference

Social issues are specifically concerned with the well-being and rights of individuals and communities, including working conditions: "Social issues in ESG include factors such as labor practices, working conditions, and human rights, which directly relate to how employees are treated within an organization".

Conclusion: Working conditions on a tree plantation are most likely an example of a social issue.



When integrating ESG analysis into the investment process, deriving correlations on how ESG factors might impact financial performance over time is an example of a:

  1. passive approach
  2. thematic approach
  3. systematic approach

Answer(s): C

Explanation:

· Systematic Approach Definition:

A systematic approach involves a structured, consistent process for integrating ESG factors into investment analysis.

It typically includes deriving correlations between ESG factors and financial performance, which helps in understanding the long-term impacts of ESG issues on investments.

· ESG Integration Process:

The process starts with identifying relevant ESG factors that could influence financial performance.

These factors are then quantified and modeled to establish their correlation with financial outcomes over time.

· Correlation Derivation:

By deriving correlations, analysts can predict how ESG factors such as climate change, labor practices, or governance issues might affect a company's profitability, risk profile, and long-term sustainability.

This involves statistical analysis and modeling, which are hallmarks of a systematic approach.

· CFA ESG Investing


Reference:

The CFA Institute's materials on ESG integration emphasize the importance of a systematic approach to incorporate ESG factors into investment analysis to enhance risk management and identify investment opportunities.



According to the Principles for Responsible Investment, which of the following engagement dynamics creates value?

  1. Political dynamics only
  2. Learning dynamics only
  3. Both political dynamics and learning dynamics

Answer(s): C

Explanation:

Principles for Responsible Investment (PRI):

The PRI framework outlines various engagement dynamics that create value in responsible investing.

Political Dynamics:

These involve building relationships with policymakers, influencing regulations, and advocating for better corporate governance standards.

Political engagement helps create a supportive regulatory environment for sustainable business practices.

Learning Dynamics:

Learning dynamics focus on enhancing knowledge and understanding of ESG issues through continuous learning and information exchange.

This includes engaging with companies to understand their ESG challenges and opportunities better.

Combination of Both Dynamics:

Both political and learning dynamics are crucial as they complement each other. Political dynamics ensure a supportive external environment, while learning dynamics enhance internal capabilities and understanding.

CFA ESG Investing


Reference:

According to the PRI, successful engagement that creates value involves both political and learning dynamics, as outlined in their engagement framework.






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