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Free CFA® Sustainable-Investing Exam Questions (page: 14)

Page 14 of 102
PDF with 802 Questions

Which of the following social factors most likely impacts a company's external stakeholders?

  1. Working conditions, health, and safety
  2. Employment standards and labor rights
  3. Product liability and consumer protection

Answer(s): C

Explanation:

Social factors that impact a company's external stakeholders include those that affect customers, local communities, and governments. Product liability and consumer protection directly influence external stakeholders by ensuring the safety, quality, and reliability of products, which in turn affects consumer trust and regulatory compliance. Working conditions, health and safety, and employment standards primarily impact internal stakeholders, such as employees.



The adoption of ESG investing by retail investors has generally been:

  1. slower than its adoption by institutional investors.
  2. at the same pace as its adoption by institutional investors.
  3. faster than its adoption by institutional investors.

Answer(s): A

Explanation:

The adoption of ESG investing by retail investors has generally been slower than its adoption by institutional investors. Institutional investors have led the way in integrating ESG factors into their investment decisions due to their larger resources and regulatory pressures. In contrast, retail investors have been slower to adopt ESG investing, though interest is growing, especially among younger generations.



Which of the following challenges is most likely related to the attribution of returns to ESG factors?

  1. Difficulty to demonstrate the value added by a programme of engagement
  2. Difficulty to assess the performance drag that comes from excluding an industrial sector
  3. Performance attribution to ESG factors is still in its early stages and may well need further assurance and consistency for it to have real power

Answer(s): C

Explanation:

One of the main challenges in attributing returns to ESG factors is the early stage of performance attribution methodologies. It is difficult to isolate the impact of ESG factors from other investment decisions due to the broad and integrated nature of ESG investing. Additionally, the need for consistent and assured methodologies is crucial for demonstrating the value added by ESG considerations in investment performance.



Which of the following countries is most likely to use a two-tier board structure?

  1. USA
  2. Japan
  3. Germany

Answer(s): C

Explanation:

Germany is most likely to use a two-tier board structure. Here's a detailed explanation:

Two-Tier Board Structure: A two-tier board structure consists of a management board and a supervisory board. The management board is responsible for day-to-day operations, while the supervisory board oversees the management board and represents the interests of shareholders.

Germany's Corporate Governance: Germany is well-known for its two-tier board system, which is a legal requirement for many large companies, especially those listed on the stock exchange. The supervisory board includes employee representatives, which is a unique feature of the German system.

Comparison with Other Countries:

USA: The USA typically uses a single-tier board structure where a single board of directors oversees the company's management. This board often includes a mix of executive and non-executive directors.

Japan: Japan has traditionally used a single-tier board structure but has been increasingly incorporating elements of a two-tier system, such as appointing outside directors. However, it does not predominantly use a two-tier structure like Germany.

CFA ESG Investing


Reference:

The CFA Institute highlights that Germany's corporate governance is characterized by the two-tier board system, which separates management and supervisory functions (CFA Institute, 2020).

This structure aims to improve oversight and accountability, aligning with Germany's emphasis on stakeholder engagement and corporate responsibility.



Which of the following statements is least accurate? Compared to social and environmental factors, governance has a:

  1. greater link to financial performance.
  2. greater consideration in traditional investment analysis.
  3. greater materiality for private companies than for public companies.

Answer(s): C

Explanation:

Compared to social and environmental factors, governance has a greater materiality for public companies than for private companies. Here's a detailed explanation:

Governance and Financial Performance: Governance factors, such as board composition, executive compensation, and shareholder rights, have been shown to have a strong link to financial performance. Good governance practices can enhance a company's transparency, accountability, and decision-making, which in turn can lead to better financial outcomes.

Traditional Investment Analysis: Governance factors have traditionally been given greater consideration in investment analysis compared to social and environmental factors. Investors have long recognized the importance of governance in assessing the risk and return profile of companies.

Materiality for Public vs. Private Companies:

Public Companies: Governance is particularly material for public companies due to the need for transparency, regulatory compliance, and the scrutiny of a larger pool of investors. Public companies are subject to more rigorous reporting requirements and shareholder engagement practices.

Private Companies: While governance is important for private companies, it is generally considered less material compared to public companies because private companies are not subject to the same level of public scrutiny and regulatory requirements.

CFA ESG Investing


Reference:

The CFA Institute notes that governance factors are crucial for public companies, impacting their financial performance and investor confidence (CFA Institute, 2020).

The emphasis on governance in traditional investment analysis reflects its critical role in ensuring sound management and oversight practices, which are essential for public companies.



Which of the following statements regarding optimization of portfolios for ESG criteria is most accurate?

  1. ESG integration may enhance the risk and return profile of portfolio optimization
  2. Optimization is limited to carbon data because of its absolute nature and more standardized reporting metrics
  3. ESG optimization via constraints is similar to exclusionary screening because it also applies a fixed decision on specific securities

Answer(s): A

Explanation:

ESG integration may enhance the risk and return profile of portfolio optimization. Here's a detailed explanation:

ESG Integration: ESG integration involves systematically incorporating environmental, social, and governance factors into investment analysis and decision-making processes. This approach aims to identify material ESG risks and opportunities that could affect the financial performance of investments.

Risk and Return Profile: By integrating ESG factors, investors can gain a more comprehensive understanding of potential risks and opportunities. This can lead to better-informed investment decisions, potentially improving the risk-adjusted returns of the portfolio.

Benefits of ESG Integration:

Risk Mitigation: Incorporating ESG factors helps investors identify and mitigate risks that traditional financial analysis might overlook. For example, companies with poor environmental practices may face regulatory fines, legal liabilities, and reputational damage.

Opportunities for Outperformance: Companies that manage ESG factors well are often more innovative, efficient, and better positioned to capitalize on emerging market trends. This can lead to superior financial performance and investment returns.

Enhanced Portfolio Resilience: ESG integration can enhance the overall resilience of a portfolio by reducing exposure to companies with high ESG risks and increasing exposure to those with strong ESG practices.

CFA ESG Investing


Reference:

The CFA Institute emphasizes that ESG integration can enhance the risk and return profile of portfolios by providing a more holistic view of investment risks and opportunities (CFA Institute, 2020).

Studies have shown that portfolios incorporating ESG factors can achieve comparable or superior financial performance compared to traditional portfolios, highlighting the potential benefits of ESG

integration.

By incorporating ESG factors into portfolio optimization, investors can potentially achieve better risk- adjusted returns and contribute to more sustainable investment outcomes.



Measuring a portfolio's carbon intensity using the European Union's Sustainable Finance Disclosure Regulation (SFDR) accounts for:

  1. Scope 1 emissions only.
  2. Scope 1 and Scope 2 emissions only.
  3. Scope 1, Scope 2, and Scope 3 emissions.

Answer(s): C

Explanation:

The European Union's Sustainable Finance Disclosure Regulation (SFDR) requires that the carbon intensity of a portfolio is measured by accounting for Scope 1, Scope 2, and Scope 3 emissions. This comprehensive approach ensures that both direct and indirect emissions across the entire value chain of the companies are considered, providing a more complete picture of the carbon footprint associated with investments.



An investor requires a social return and will tolerate a sub-market financial return. This best characterizes:

  1. social investing.
  2. impact investing.
  3. sustainable and responsible investing.

Answer(s): B

Explanation:

Impact investing is characterized by the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. Investors engaged in impact investing are often willing to accept sub-market financial returns to achieve their social or environmental goals. This differentiates impact investing from social investing, which may focus more on avoiding negative impacts, and sustainable and responsible investing, which seeks to balance financial returns with ESG factors.



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