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Free ESG-Investing Exam Braindumps (page: 9)

Page 8 of 118
PDF with 468 Questions

Avoiding long term transition risk can most likely be achieved by:

  1. investing in companies with stranded assets.
  2. divesting highly carbon-intensive investments in the energy sector.
  3. reducing exposure to companies exposed to extreme weather events

Answer(s): B

Explanation:

Avoiding long-term transition risk can most likely be achieved by divesting highly carbon-intensive investments in the energy sector. Here's why:

Long-term Transition Risk:

Transition risk refers to the financial risks associated with the transition to a low-carbon economy. Carbon-intensive investments are particularly vulnerable as regulations and market preferences shift towards cleaner energy.

Divesting from these investments reduces exposure to potential losses from stranded assets and regulatory penalties.

This strategy aligns with the need to mitigate long-term transition risks, ensuring portfolio resilience as the global economy transitions to sustainable energy sources.

CFA ESG Investing


Reference:

The CFA ESG Investing curriculum discusses strategies for managing transition risks, highlighting divestment from carbon-intensive sectors as an effective approach to mitigate long-term risks and align with sustainable investment practices.



Increased investment crowding into more ESG-friendly sectors is most likely to increase

  1. valuations
  2. expected returns.
  3. materiality thresholds

Answer(s): A

Explanation:

Increased investment crowding into more ESG-friendly sectors is most likely to increase valuations.
When a significant amount of capital flows into ESG-friendly sectors, the demand for these assets rises, leading to higher prices and, consequently, higher valuations.

Demand and Supply Dynamics: As more investors seek to allocate their capital to ESG-friendly sectors, the increased demand for these assets outpaces the supply, driving up prices.

Market Perception: ESG-friendly sectors are often perceived as more sustainable and less risky in the long term. This positive market perception contributes to higher valuations as investors are willing to pay a premium for such assets.

Lower Cost of Capital: Companies in ESG-friendly sectors may benefit from a lower cost of capital due to their attractiveness to investors. This can further enhance their valuations as the lower cost of capital translates into higher net present value of future cash flows.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the impact of increased capital flows into ESG- friendly sectors on market valuations.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the relationship between investor demand for ESG assets and their market valuations.



In ESG integration, which of the following best describes a data-mformed analytical opinion designed to support investment decision-making?

  1. ESG screening
  2. Integrated research
  3. Voting and governance advice

Answer(s): B

Explanation:

In ESG integration, a data-informed analytical opinion designed to support investment decision- making is best described as integrated research. Integrated research involves the incorporation of ESG data and analysis into the traditional financial analysis to form a comprehensive view of an investment's potential risks and opportunities.

Holistic Analysis: Integrated research combines ESG factors with traditional financial metrics to provide a more complete assessment of an investment. This approach helps in identifying both financial and non-financial risks and opportunities.

Informed Decision-Making: By integrating ESG data into the investment analysis, investors can make more informed decisions that consider the long-term sustainability and impact of their investments.

Enhanced Due Diligence: Integrated research enhances the due diligence process by evaluating how

ESG factors may affect the financial performance and risk profile of an investment.


Reference:

MSCI ESG Ratings Methodology (2022) - Emphasizes the importance of integrating ESG data into investment research to support decision-making.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the role of integrated research in comprehensive ESG analysis and its impact on investment strategies.



Which of the following ESG investment approaches would most appropriately be used to construct a balanced and diversified portfolio?

  1. Thematic investing
  2. Screening on a relative basis
  3. Screening on an absolute basis

Answer(s): B

Explanation:

Screening on a relative basis would most appropriately be used to construct a balanced and diversified portfolio. This approach involves comparing companies within the same industry or sector and selecting those that perform better on ESG criteria relative to their peers.

Relative Comparison: Screening on a relative basis allows investors to identify the best-performing companies within each sector or industry, ensuring a balanced approach across different segments of the market.

Diversification: By selecting top ESG performers from various industries, investors can maintain a diversified portfolio while still adhering to ESG principles. This helps in spreading risk across different sectors.

Sector-Neutral: This approach ensures that the portfolio is not overly concentrated in specific sectors, which can happen with thematic investing or absolute screening. It allows for sector-neutrality, maintaining exposure to a broad range of industries.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the benefits of relative ESG screening for constructing diversified portfolios.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the importance of maintaining diversification while applying ESG criteria in portfolio construction.






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