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CFA Sustainable-Investing Exam
Sustainable Investing Certificate(CFA-SIC) (Page 22 )

Updated On: 9-Feb-2026
Page 22 of 162
PDF with 802 Questions

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.



Which of the following best summarizes the studies on carbon risk?

  1. Companies with lower levels of CO2 emissions are associated with higher returns
  2. Companies with higher levels of CO2 emissions are associated with higher returns
  3. There is no conclusive evidence on the link between a company's level of CO2 emissions and returns

Answer(s): C

Explanation:

Studies on carbon risk have not provided conclusive evidence linking a company's level of CO2 emissions directly to financial returns.
While some studies suggest that companies with lower emissions may be better positioned for long-term success due to regulatory and market shifts, other research indicates that the relationship is complex and influenced by various factors. Therefore, it is not universally accepted that lower emissions consistently correlate with higher returns, nor that higher emissions necessarily lead to higher returns.

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