Cisco®
CompTIA
Checkpoint
ISC
EC-Council
EXIN
Fortinet
ITIL®
Juniper
Microsoft
VMware
Avaya
SAP
Google
Salesforce
Amazon
Palo Alto Networks
ISC2
All Vendors
  2. Home
  3. Exams
  4. CFA®
  5. Sustainable-Investing

Free CFA® Sustainable-Investing Exam Questions

Performance materiality:

  1. is usually higher than overall materiality
  2. is set lower when financial controls are strong.
  3. can indicate the auditor's level of trust in a company's financial systems.

Answer(s): A

Explanation:

Performance materiality is usually higher than overall materiality. Performance materiality is a threshold set below the overall materiality level to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.

Risk Mitigation: Performance materiality is set higher to provide a buffer that helps ensure that the risk of undetected misstatements that are individually immaterial but collectively significant is minimized.

Audit Strategy: By setting performance materiality at a higher level, auditors can perform more targeted and effective audit procedures. This helps in identifying and addressing potential misstatements that might otherwise go unnoticed.

Compliance and Trust: Higher performance materiality enhances the reliability of the financial statements, ensuring compliance with accounting standards and increasing stakeholders' trust in the financial reporting process.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the concept of performance materiality and its role in audit risk management.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the importance of performance materiality in ensuring accurate and reliable financial reporting.



low risk exposure to this factor in the short run

  1. With reference to data security and customer privacy issues a technology company in the research and development stage with no commercially marketed products is most likely to have:
  2. medium risk exposure to this factor in the short run.
  3. high risk exposure to this factor in the short run.

Answer(s): A

Explanation:

With reference to data security and customer privacy issues, a technology company in the research and development stage with no commercially marketed products is most likely to have low risk exposure to this factor in the short run.

Limited Customer Data: Since the company is still in the R&D stage and has no commercially marketed products, it is less likely to handle significant amounts of customer data, reducing the immediate risk of data security and privacy issues.

Focus on Development: The primary focus during the R&D stage is on product development and innovation rather than on managing and protecting customer data. This stage involves less exposure to operational risks associated with data breaches or privacy violations.

Short-term Horizon: In the short run, the company's activities are centered on creating and testing new technologies.
While data security and privacy will become critical as the company moves towards commercialization, the immediate risk exposure is relatively low.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the varying risk exposures to data security and privacy issues based on a company's stage of development.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the lower risk exposure of companies in early development stages regarding customer data security and privacy



Which of the following statements regarding ESG screening is most accurate?

  1. There is limited availability of sustainability ratings for collective funds
  2. ESG screening does not consider stewardship and engagement activities
  3. Only collective funds with a high level of ESG integration have a high sustainability rating

Answer(s): A

Explanation:

The most accurate statement regarding ESG screening is that there is limited availability of sustainability ratings for collective funds.
While individual companies often have detailed ESGratings, collective funds, such as mutual funds and ETFs, have fewer sustainability ratings available.

ESG Data Challenges: The assessment of collective funds requires aggregating ESG data from all underlying holdings. This process can be complex and is less standardized compared to evaluating individual companies.

Limited Coverage: Many ESG rating agencies focus primarily on providing ratings for individual securities rather than collective funds. As a result, the availability of comprehensive ESG ratings for collective funds is limited.

Investor Demand: Although there is growing demand for ESG information on collective funds, the market is still developing. Rating agencies are gradually expanding their coverage, but it remains less extensive compared to individual securities.


Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the challenges and limitations in providing ESG ratings for collective funds compared to individual securities.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the current state of ESG ratings availability for collective funds and the evolving market demand.



The role of auditors is to assess the financial reports prepared by management and to provide assurance that:

  1. the numbers are correct
  2. there is no fraud within the business.
  3. the reports fairly represent the performance and position of the business

Answer(s): C

Explanation:

The role of auditors is to assess the financial reports prepared by management and to provide assurance that the reports fairly represent the performance and position of the business. Auditors do not guarantee that the numbers are correct or that there is no fraud; rather, they provide an opinion on the overall fairness and accuracy of the financial statements.

Audit Opinion: Auditors provide an independent opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

Reasonable Assurance: Auditors aim to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. This involves evaluating the appropriateness of accounting policies and the reasonableness of significant estimates made by management.

Stakeholder Confidence: By providing assurance on the fairness of financial reports, auditors enhance the confidence of stakeholders, including investors, creditors, and regulators, in the financial information provided by the company.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the role of auditors in providing assurance on financial statements and enhancing stakeholder trust.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the importance of auditors in ensuring the fair representation of a company's financial performance and position.



Regarding ESG issues, which of the following sets the tone for the investment value chain?

  1. Asset owners
  2. Asset managers
  3. Investment consultants

Answer(s): A

Explanation:

Regarding ESG issues, asset owners set the tone for the investment value chain. Asset owners, such as pension funds, endowments, and insurance companies, have significant influence over the incorporation of ESG factors in investment strategies due to their large capital allocations and long- term investment horizons.

Investment Mandates: Asset owners often set ESG-related mandates and guidelines for asset managers, influencing how ESG factors are integrated into investment decisions. Their requirements shape the strategies and practices of the entire investment value chain.

Demand for ESG Integration: By prioritizing ESG considerations, asset owners drive demand for sustainable investment products and services. This, in turn, encourages asset managers and investment consultants to develop and offer ESG-integrated solutions.

Leadership Role: Asset owners play a leadership role in promoting sustainable investing practices. Their commitment to ESG issues can lead to broader adoption and standardization of ESG integration across the investment industry.


Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the critical role of asset owners in setting ESG priorities and influencing the investment value chain.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the impact of asset owners' ESG mandates on the practices of asset managers and the broader investment ecosystem



A discount retailer facing high employee turnover due to poor working conditions will most likely experience:

  1. significant liabilities
  2. greater operating costs.
  3. an adverse impact on revenues

Answer(s): B

Explanation:

A discount retailer facing high employee turnover due to poor working conditions will most likely experience greater operating costs. High employee turnover can lead to several cost-related challenges that impact the overall efficiency and profitability of the business.

Recruitment and Training Costs: High turnover rates necessitate frequent recruitment and training of new employees. These activities incur significant costs in terms of time, resources, and money.

Productivity Losses: Frequent turnover can lead to disruptions in operations and lower productivity. New employees may take time to reach the productivity levels of their predecessors, leading to inefficiencies.

Quality and Customer Service: Poor working conditions and high turnover can negatively affect the quality of service and customer satisfaction. Consistent service quality is critical in retail, and turnover can result in inconsistent customer experiences, potentially reducing revenue.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the financial impact of high employee turnover on operating costs and overall business performance.



To fall in scope of mandatory compliance with the EU's Corporate Sustainability Reporting Directive (CSRD), companies would need to meet which of the following conditions?

Condition 1EUR40 million in net turnover

Condition 2EUR20 million in assets

Condition 3250 or more employees

  1. Any one of these conditions
  2. Any two of these conditions
  3. All three of these conditions

Answer(s): B

Explanation:

The EU's Corporate Sustainability Reporting Directive (CSRD) mandates that companies need to meet at least two of the following three criteria to fall under its scope of mandatory compliance:

EUR 40 million in net turnover

EUR 20 million in assets

250 or more employees

This requirement is designed to ensure that significant entities are subject to sustainability reporting, reflecting their potential impact on and responsibility towards environmental, social, and governance (ESG) factors.


Reference:

The CSRD directive outlines the scope and criteria for mandatory sustainability reporting within the EU.



Which of the following is most likely an example of a negative externality?

  1. Impairment costs incurred by a company due to regulatory changes
  2. Direct costs incurred by a company in reducing environmental damages
  3. Indirect costs incurred by third parties due to environmental damages caused by a company

Answer(s): C

Explanation:

Negative externalities refer to the adverse effects or costs that are incurred by third parties due to the actions or activities of a company, without these costs being reflected in the company's financial statements. These are costs borne by society or the environment rather than the company itself. Examples include pollution, health costs due to emissions, and environmental degradation.


Reference:

MSCI ESG Ratings Methodology emphasizes understanding externalities, including environmental impacts, as significant ESG risks that can translate into financial risks over time.



Viewing page 10 of 102
Viewing questions 73 - 80 out of 802 questions



Post your Comments and Discuss CFA® Sustainable-Investing exam prep with other Community members:

Sustainable-Investing Exam Discussions & Posts