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CFA Sustainable-Investing Exam
Sustainable Investing Certificate(CFA-SIC) (Page 27 )

Updated On: 9-Feb-2026
Page 27 of 162
PDF with 802 Questions

In the investment management industry, triple bottom line accounting theory:

  1. replaces a broader framework of sustainability.
  2. complements a broader framework of sustainability.
  3. has been replaced by a broader framework of sustainability.

Answer(s): B

Explanation:

Triple Bottom Line Accounting Theory:

Triple Bottom Line (TBL) accounting theory expands the traditional reporting framework to include ecological and social performance in addition to financial performance. This approach was introduced by John Elkington in 1994 to measure the sustainability and societal impact of an organization.

1. Triple Bottom Line (TBL): The TBL framework considers three dimensions of performance: social (people), environmental (planet), and financial (profit). It aims to go beyond the traditional financial metrics to include a broader spectrum of values and criteria for measuring organizational success.

2. Complementing Broader Sustainability Frameworks: Rather than replacing or being replaced by broader sustainability frameworks, TBL complements these frameworks by providing a specific approach to measure and report on sustainability. It integrates well with various sustainability initiatives and standards by offering a clear structure for reporting and accountability across the three pillars of sustainability.

Reference from CFA ESG Investing:

Triple Bottom Line: The CFA Institute discusses how TBL accounting theory provides a comprehensive approach to measuring and reporting on an organization's impact on people, the planet, and profits. This framework complements broader sustainability initiatives by ensuring that environmental and social impacts are considered alongside financial performance.

Sustainability Reporting: The integration of TBL with broader sustainability frameworks helps organizations adopt a holistic view of their impact and performance, aligning with global standards and best practices in ESG reporting.

In conclusion, triple bottom line accounting theory complements a broader framework of sustainability, making option B the verified answer.



When accounting for a critical weakness in a company's environmental management process, an analyst using a discounted cash flow (DCF) valuation model should:

  1. decrease the cost of capital.
  2. not change the cost of capital.
  3. increase the cost of capital.

Answer(s): C

Explanation:

When using a discounted cash flow (DCF) valuation model, analysts must consider various risk factors that can affect the valuation. A critical weakness in a company's environmental management process represents an increased risk, which can impact the cost of capital.

1. Cost of Capital: The cost of capital represents the rate of return required by investors to compensate for the risk of an investment. It includes the cost of equity and the cost of debt, weighted according to the company's capital structure.

2. Impact of Environmental Risks: A critical weakness in environmental management indicates potential risks, such as regulatory fines, cleanup costs, litigation, or damage to the company's reputation. These risks can increase the uncertainty and perceived risk of investing in the company, leading investors to demand a higher return to compensate for these risks.

3. Increasing the Cost of Capital: Given the increased risk associated with poor environmental management, the appropriate response is to increase the cost of capital in the DCF model. This adjustment reflects the higher risk premium required by investors due to the potential negative financial impacts of environmental issues.

Reference from CFA ESG Investing:

Cost of Capital and Risk: The CFA Institute explains that the cost of capital should reflect the risks associated with an investment.
When a company faces significant environmental risks, analysts should adjust the cost of capital upwards to account for the increased uncertainty and potential financial impacts.

DCF Valuation Adjustments: The DCF valuation model requires careful consideration of all risk factors. Adjusting the cost of capital to reflect environmental risks ensures that the valuation accurately captures the potential impact on future cash flows and investor returns.

In conclusion, when accounting for a critical weakness in a company's environmental management process, an analyst should increase the cost of capital, making option C the verified answer.



Which of the following UK Stewardship Code principles is not addressed in the European Fund and Asset Management Association (EFAMA) Code? The principle that institutional investors should:

  1. monitor their investee companies
  2. report periodically on their stewardship and voting activities
  3. have a robust policy on managing conflicts of interest in relation to stewardship

Answer(s): B

Explanation:

The UK Stewardship Code and the European Fund and Asset Management Association (EFAMA) Code both aim to enhance the quality of stewardship and engagement by institutional investors. However, there are some differences in the principles they address.

1. UK Stewardship Code Principles: The UK Stewardship Code outlines several principles for institutional investors, including monitoring investee companies, managing conflicts of interest, and reporting on stewardship and voting activities.

2. EFAMA Code Principles: The EFAMA Code, while similar in many respects, does not explicitly address all the principles covered by the UK Stewardship Code. One of the key differences is the requirement for institutional investors to report periodically on their stewardship and voting activities.

3. Reporting on Stewardship and Voting Activities: The UK Stewardship Code emphasizes the importance of transparency and accountability by requiring institutional investors to report periodically on their stewardship and voting activities. This principle is not explicitly addressed in the EFAMA Code, making it a notable difference between the two frameworks.

Reference from CFA ESG Investing:

Stewardship Codes: The CFA Institute highlights the importance of stewardship codes in promoting responsible investment practices.
While both the UK Stewardship Code and the EFAMA Code encourage active engagement and monitoring of investee companies, the UK code places a stronger emphasis on reporting and transparency in stewardship activities.

Transparency in Stewardship: Reporting on stewardship and voting activities is crucial for ensuring that institutional investors are accountable to their beneficiaries and stakeholders. The UK Stewardship Code's focus on this principle underscores its commitment to enhancing the quality and transparency of stewardship practices.

In conclusion, the principle that institutional investors should report periodically on their stewardship and voting activities is not addressed in the EFAMA Code, making option B the verified answer.



Which of the following would most likely be the initial step when drafting a client's investment mandate?

  1. Defining how to measure ESG performance
  2. Clarifying the client's ESG investment beliefs
  3. Defining how to measure financial performance

Answer(s): B

Explanation:

The initial step when drafting a client's investment mandate should be clarifying the client's ESG investment beliefs. This foundational step helps in defining the client's values, objectives, and priorities related to ESG, which will guide the entire investment strategy and ensure that it aligns with the client's expectations and goals.



Which of the following encourages institutional investors to work together on human rights and social issues?

  1. Human Rights 100+
  2. OECD Guidelines for Multinational Enterprises
  3. United Nations Guiding Principles on Business and Human Rights

Answer(s): C

Explanation:

The United Nations Guiding Principles on Business and Human Rights encourage institutional investors to work together on human rights and social issues. These principles provide a global standard for preventing and addressing the risk of adverse impacts on human rights linked to business activity, promoting collaborative efforts among investors to uphold human rights standards.






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