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Free ESG-Investing Exam Braindumps (page: 58)

Page 57 of 118
PDF with 468 Questions

Which of the following investor types most likely prefers exclusions as an ESG approach?

  1. Life insurers
  2. Foundations
  3. General insurers

Answer(s): B

Explanation:

Step 1: Understanding ESG Approaches

ESG approaches include exclusions, where certain investments are excluded from a portfolio based on ethical, moral, or ESG criteria.

Step 2: Investor Types and ESG Preferences

Life Insurers: Focus more on long-term liabilities and often integrate ESG factors without strict exclusions.

Foundations: Tend to have strong ethical and mission-driven mandates, leading them to prefer exclusions to ensure investments align with their values.

General Insurers: Similar to life insurers, they may integrate ESG factors but do not typically rely on exclusions as their primary approach.

Step 3: Verification with ESG Investing Reference

Foundations are mission-driven and often prefer exclusions to ensure their investments align with their ethical and social objectives: "Foundations are more likely to adopt exclusionary approaches to ensure their investments reflect their mission and ethical values".

Conclusion: Foundations most likely prefer exclusions as an ESG approach.



ESG philosophy can be embedded within an investment mandate to determine:

  1. the asset owner's tactical asset allocation only
  2. the asset owner's strategic asset allocation only
  3. both the asset owner's tactical and strategic asset allocations

Answer(s): C

Explanation:

Step 1: ESG Philosophy in Investment Mandates

An ESG philosophy embedded within an investment mandate means integrating ESG factors into the overall investment strategy, influencing both short-term (tactical) and long-term (strategic) decisions.

Step 2: Tactical vs. Strategic Asset Allocation

Tactical Asset Allocation: Short-term adjustments to the asset mix based on market conditions.

Strategic Asset Allocation: Long-term asset mix decisions based on the investor's objectives, risk tolerance, and time horizon.

Step 3: Verification with ESG Investing Reference

Embedding ESG philosophy within an investment mandate affects both tactical and strategic asset allocations, ensuring ESG factors are considered in all investment decisions: "Integrating ESG

considerations into investment mandates ensures that both tactical and strategic asset allocation decisions align with sustainability goals".

Conclusion: ESG philosophy can be embedded within an investment mandate to determine both the asset owner's tactical and strategic asset allocations.



Which of the following statements regarding ESG considerations and sovereign debt is most accurate?

  1. There is little correlation between ESG risk and credit ratings
  2. ESG integration in sovereign debt is at similar levels to listed equities and corporate debt
  3. ESG ratings tend to be structurally lower for emerging countries relative to developed economies

Answer(s): C

Explanation:

Step 1: ESG Considerations in Sovereign Debt

Integrating ESG factors into sovereign debt involves assessing a country's environmental, social, and governance characteristics. This process can reveal structural differences between countries, especially between developed and emerging economies.

Step 2: Key Differences in ESG Ratings

Little Correlation between ESG Risk and Credit Ratings: There is some correlation, but not enough to negate the importance of ESG factors.

Similar Levels of ESG Integration: ESG integration in sovereign debt is generally not as advanced as in listed equities and corporate debt.

Structural Differences: Emerging countries often have lower ESG ratings due to governance issues, environmental challenges, and social factors compared to developed economies.

Step 3: Verification with ESG Investing Reference

ESG ratings for emerging countries are typically lower due to various structural challenges, which affect their overall ESG scores: "Emerging economies tend to have lower ESG ratings compared to developed countries, reflecting ongoing governance, environmental, and social issues".

Conclusion: ESG ratings tend to be structurally lower for emerging countries relative to developed economies.



The perpetual compound annual rate that a company's cash flow is assumed to change by after the discrete forecasting period is referred to as the:

  1. discount rate
  2. terminal growth rate
  3. required rate of return

Answer(s): B

Explanation:

· Terminal Growth Rate Definition:

The terminal growth rate is the perpetual compound annual rate at which a company's cash flow is assumed to grow after the discrete forecasting period.

It is a critical input in the discounted cash flow (DCF) model used to estimate the present value of a company.

· Usage in DCF Analysis:

After forecasting free cash flows for a specific period, typically 5-10 years, a terminal value is calculated to capture the value of the business beyond the forecast period.

The terminal growth rate is applied to the final year's cash flow to estimate this terminal value.

· Importance of Terminal Growth Rate:

It represents the expected long-term growth rate of the company and significantly impacts the valuation.

Assumptions about this rate must be reasonable and aligned with long-term economic growth projections.

·


Reference:

The terminal growth rate is a well-established concept in financial analysis and valuation, particularly within the context of the DCF model, as outlined in various CFA Institute materials on valuation and financial analysis.






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