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CFA Sustainable-Investing Exam
Sustainable Investing Certificate(CFA-SIC) (Page 11 )

Updated On: 9-Feb-2026
Page 11 of 162
PDF with 802 Questions

When incorporating ESG factors into valuation inputs, which of the following would most likely require the lowest discount rate?

  1. A company with strong ESG practices
  2. A high-growth technology company operating in emerging markets
  3. A company that is judged to have a negative environmental impact

Answer(s): A

Explanation:

When incorporating ESG factors into valuation inputs, a company with strong ESG practices would most likely require the lowest discount rate. This is because strong ESG practices are associated with lower risks, which can lead to more stable and predictable cash flows.

Lower Risk Premium: Companies with robust ESG practices are often perceived as less risky due to better governance, risk management, and sustainability practices. This lowers the risk premium and, consequently, the discount rate.

Stable Cash Flows: Strong ESG practices contribute to long-term sustainability and can lead to more reliable and stable cash flows. This stability justifies a lower discount rate in valuation models.

Positive Market Perception: Companies with strong ESG credentials may enjoy a better reputation and greater investor confidence, which can reduce the cost of capital and support a lower discount rate.


Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the relationship between strong ESG practices and lower financial risk.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses how ESG factors are integrated into valuation models and their impact on discount rates.



Excluding investment in companies with a history of labor infractions is best categorized as a(n):

  1. universal exclusion.
  2. idiosyncratic exclusion.
  3. conduct-related exclusion

Answer(s): C

Explanation:

Excluding investment in companies with a history of labor infractions is best categorized as a conduct-related exclusion. This type of exclusion focuses on the behavior and practices of companies, particularly in relation to their treatment of employees and adherence to labor standards.

Behavioral Criteria: Conduct-related exclusions target specific behaviors or practices that are deemed unacceptable, such as labor infractions, human rights violations, or environmental harm.

Ethical Considerations: These exclusions are based on ethical and social considerations, aiming to avoid investing in companies that do not meet certain standards of conduct.

Impact on Valuation: By excluding companies with poor labor practices, investors aim to reduce exposure to risks associated with legal liabilities, reputational damage, and operational disruptions.


Reference:

MSCI ESG Ratings Methodology (2022) - Explains different types of exclusion criteria, including conduct-related exclusions, and their rationale.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the importance of considering company behavior in ESG investment strategies.



According to the Active Ownership study, which of the following statements regarding ESG engagement is most accurate?

  1. Unsuccessful engagements often have adverse impacts on returns
  2. Success is typically achieved within 12 months of the initial engagement
  3. Successful engagement activity was followed by positive abnormal financial returns

Answer(s): C

Explanation:

According to the Active Ownership study, successful engagement activity was followed by positive abnormal financial returns. This indicates that engaging with companies to improve their ESG practices can lead to better financial performance.

Improved Performance: Companies that respond positively to ESG engagements often improve their ESG practices, which can enhance their operational efficiency, reduce risks, and improve profitability.

Market Recognition: Successful engagements can also lead to positive market perception and investor confidence, which can drive up stock prices and result in positive abnormal returns.

Long-term Value Creation: Effective ESG engagements contribute to long-term value creation by addressing material ESG issues that can impact a company's financial performance and sustainability.


Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the link between successful ESG engagements and improved financial performance.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the findings of the Active Ownership study and the impact of ESG engagements on financial returns.



In which country is the proposal of shareholder resolutions most common?

  1. UK
  2. US
  3. Australia

Answer(s): B

Explanation:

Prevalence in the US:

Shareholder resolutions are a prominent feature of the corporate governance landscape in the United States. They allow shareholders to propose changes or raise concerns about a company's policies, practices, and governance.

According to the CFA Institute, the US has a well-established tradition of shareholder activism, with a significant number of resolutions submitted annually on various issues, including ESG matters.

Regulatory Framework:

The regulatory framework in the US, particularly the rules enforced by the Securities and Exchange Commission (SEC), provides shareholders with the right to propose resolutions and ensures that these proposals are included in the company's proxy materials if they meet certain criteria.

The CFA Institute notes that the US regulatory environment is conducive to shareholder activism, facilitating the submission and consideration of shareholder resolutions.

Engagement and Influence:

Shareholder resolutions are an important engagement tool for investors in the US, allowing them to influence corporate behavior and advocate for changes in policies related to environmental, social, and governance issues.

The MSCI ESG Ratings Methodology highlights that shareholder resolutions can drive significant changes in company practices, particularly when they garner substantial support from investors.

Comparison with Other Countries:

While shareholder resolutions are also used in other countries such as the UK and Australia, the frequency and impact of these resolutions are more pronounced in the US.

The CFA Institute indicates that the shareholder resolution process in the US is more formalized and widely used compared to other jurisdictions, making it the most common country for the proposal of shareholder resolutions.


Reference:

CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals."

MSCI ESG Ratings Methodology, which discusses the role of shareholder resolutions in corporate governance.



Which of the following emphasizes that short-term investment performance will be of limited significance in evaluating the manager?

  1. Brunel Asset Management Accord
  2. International Corporate Governance Network (ICGN) Model Mandate
  3. Principals for Responsible Investment's (PRI) Practical Guide to ESG Integration for Equity Investing

Answer(s): B

Explanation:

ICGN Model Mandate:

The ICGN Model Mandate is designed to align the interests of asset owners and asset managers with a focus on long-term value creation rather than short-term performance metrics.

According to the CFA Institute, the ICGN Model Mandate sets out principles and practices that encourage long-term investment strategies and de-emphasize the significance of short-term performance.

Focus on Long-Term Performance:

The Model Mandate highlights that evaluating investment managers based on short-term performance can lead to suboptimal investment decisions and may encourage behaviors that are not aligned with the long-term interests of asset owners.

The CFA Institute notes that the ICGN Model Mandate promotes a longer-term perspective in investment evaluation, which is crucial for sustainable value creation.

Investment Principles:

The ICGN Model Mandate includes guidelines for performance assessment, stating that short-term underperformance should not be a primary concern if the investment process and long-term strategy are sound.

The Brunel Asset Management Accord echoes this sentiment by emphasizing that short-term performance will be of limited significance in evaluating the manager, aligning with the principles set forth by the ICGN.

Implementation:

Asset owners are encouraged to adopt the ICGN Model Mandate to ensure that their investment mandates and manager evaluations reflect a commitment to long-term performance and sustainable investing.

The CFA Institute suggests that integrating these principles into investment mandates helps mitigate the risks associated with short-termism and supports the alignment of investment strategies with long-term goals.


Reference:

CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals."

ICGN Model Mandate documents, which outline the emphasis on long-term performance over short- term metrics.






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