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 (page: 3)

Page 3 of 102
PDF with 802 Questions

The concept of double-agency in society refers to the conflict of interest between

  1. corporate CEOs and shareholders
  2. money managers and asset owners.
  3. corporate CEOs and money managers

Answer(s): B

Explanation:

The concept of double-agency in society refers to the conflict of interest between money managers and asset owners. This concept arises when there are two levels of agency relationships, each with potential conflicts of interest.

Principal-Agent Relationship: In the first level, asset owners (principals) delegate the management of their assets to money managers (agents). The money managers are expected to act in the best interests of the asset owners, but their own interests might not always align with those of the asset owners.

Secondary Agency: The second level involves the relationship between the corporate CEOs (agents) and the company's shareholders (principals). Here, the CEOs are supposed to act in the best interests of the shareholders, but again, there might be conflicts of interest.

Double-Agency Conflict: The double-agency conflict occurs because the money managers, who are agents of the asset owners, also act as principals when dealing with corporate CEOs. This dual role can lead to conflicts where the money managers' decisions may benefit themselves or the CEOs rather than the asset owners.


Reference:

MSCI ESG Ratings Methodology (2022) - Explains the principal-agent relationships and how conflicts of interest can arise at multiple levels, leading to the double-agency problem.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the importance of aligning interests between asset owners, money managers, and corporate executives to mitigate the double-agency issue.



In France, shareholders eligible for being awarded double voting rights are

  1. founding shareholders during an IPO
  2. long-standing shareholders of at least two years.
  3. minority shareholders that are employee representatives

Answer(s): B

Explanation:

In France, shareholders eligible for being awarded double voting rights are long-standing shareholders of at least two years. This policy aims to encourage long-term investment and shareholder loyalty.

Loyalty Incentive: The double voting rights are granted to shareholders who have held their shares for at least two years. This incentivizes long-term holding and aligns shareholders' interests with the company's long-term success.

Strengthening Governance: By rewarding long-term shareholders with additional voting power,

companies can strengthen their governance structures. Long-term shareholders are more likely to be interested in sustainable growth and responsible governance.

Legal Framework: This practice is embedded in the French legal framework under the Florange Act, which automatically grants double voting rights to shares held for at least two years unless the company's articles of association specify otherwise.


Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the mechanisms in place in different jurisdictions to promote long-term investment through measures such as double voting rights.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the importance of shareholder engagement and long-term investment incentives in corporate governance.



Which of the following asset classes has the lowest degree of ESG integration?

  1. Sovereign debt
  2. Investment grade corporate debt
  3. Emerging markets corporate debt

Answer(s): A

Explanation:

Sovereign debt has the lowest degree of ESG integration compared to investment-grade corporate debt and emerging markets corporate debt. This is due to several factors:

Limited ESG Data: There is generally less ESG data available for sovereign issuers compared to corporate issuers. Sovereign ESG assessments rely on country-level indicators, which may not be as detailed or specific as corporate ESG disclosures.

Complexity of ESG Factors: The ESG factors affecting sovereign debt are more complex and broader in scope, encompassing issues like political stability, governance, human rights, and environmental policies. This complexity makes it challenging to integrate ESG factors effectively.

Market Practices: The integration of ESG factors into sovereign debt investment processes is less advanced compared to corporate debt markets.
While there is growing interest, the methodologies and frameworks for assessing sovereign ESG risks are still developing.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the challenges and current state of ESG integration across different asset classes, highlighting the relative lag in sovereign debt.

ESG-Ratings-Methodology-Exec-Summary (2022) - Provides insights into the varying degrees of ESG integration in different asset classes and the factors contributing to these differences.



A company reduces water usage and increases usage of more expensive resources after regulations become more stringent. This most likely impacts:

  1. revenues
  2. provisions
  3. operating expenditure

Answer(s): C

Explanation:

When a company reduces water usage and increases the use of more expensive resources due to more stringent regulations, this directly impacts its operating expenditure (OPEX). Here's a detailed breakdown:

Regulatory Compliance:

As regulations become stricter, companies often need to adopt new technologies or practices that may be more costly. This increase in cost is directly related to the day-to-day operations of the company, affecting operating expenditures.

For example, implementing water-saving technologies or switching to sustainable raw materials that are more expensive than traditional ones will raise the ongoing costs associated with production.

Impact on Revenues:

While reducing water usage and adhering to stricter regulations can have long-term benefits for the company, such as improved sustainability ratings and possibly higher market valuation, these changes do not typically have an immediate direct impact on revenues. Revenues are more directly influenced by sales and market demand.

Impact on Provisions:

Provisions are set aside for future liabilities or losses, such as environmental remediation costs or legal disputes.
While stricter regulations might eventually lead to increased provisions, the immediate impact of switching to more expensive resources affects operating expenditure first.

CFA ESG Investing


Reference:

The CFA ESG Investing curriculum highlights the importance of understanding how regulatory changes can affect various aspects of a company's financials. Operating expenditure is often highlighted as the most immediately impacted area when companies adapt their operations to comply with new environmental standards.



Under the disclosure guide for public equities published by the Pension and Lifetime Savings Association (PLSA). fund managers are expected to report on:

  1. ESG integration only.
  2. stewardship activities only.
  3. both ESG integration and stewardship activities

Answer(s): C

Explanation:

Under the disclosure guide for public equities published by the Pension and Lifetime Savings Association (PLSA), fund managers are expected to report on both ESG integration and stewardship activities. Here's a detailed explanation:

ESG Integration:

Fund managers are required to disclose how they integrate ESG factors into their investment processes. This includes the identification and management of ESG risks and opportunities.

They need to provide examples of material ESG factors identified in their analysis, how these factors influence their investment decisions, and how they monitor ESG risks over time .

Stewardship Activities:

Stewardship activities involve how fund managers engage with companies they invest in to promote sustainable business practices and good governance.

This includes voting at shareholder meetings, engaging in dialogue with company management, and participating in collaborative initiatives aimed at improving ESG standards across the industry .

CFA ESG Investing


Reference:

The CFA Institute's ESG curriculum emphasizes the dual role of ESG integration and stewardship in sustainable investing. Both aspects are crucial for ensuring that ESG considerations are fully embedded in the investment process and that fund managers actively contribute to improving corporate practices through engagement and voting .



Which of the following is a form of individual engagement?

  1. Generic letter
  2. Soliciting support
  3. Informal discussions

Answer(s): C

Explanation:

Individual engagement refers to direct and personal interactions between investors and companies. Informal discussions are a form of individual engagement where investors engage directly with company representatives to discuss specific concerns, insights, or feedback related to ESG issues.

Direct Interaction: Informal discussions involve direct communication between the investor and the company. This can be through meetings, phone calls, or casual conversations, providing a platform for open and candid dialogue.

Specific and Personalized: These discussions are tailored to the specific company and the investor's concerns. Unlike generic letters, which are broad and non-specific, informal discussions allow for detailed and nuanced conversations.

Relationship Building: Informal discussions help build and strengthen relationships between investors and company representatives. This can lead to more effective communication and collaboration on ESG matters.


Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the importance of direct engagement and relationship building in effective ESG integration.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses various forms of engagement, emphasizing the value of personalized and informal interactions.



According to the UK Investor Forum which of the following is a key success factor for effective engagement?

  1. Transparency on conflicts of interest
  2. Regulatory approval of the collaboration
  3. Clear leadership with appropriate relationships, skills and knowledge

Answer(s): C

Explanation:

According to the UK Investor Forum, a key success factor for effective engagement is clear leadership with appropriate relationships, skills, and knowledge. Effective engagement requires strong leadership to drive the process and ensure that the engagement is meaningful and productive.

Leadership: Clear leadership is essential to guide the engagement process, set objectives, and ensure that the engagement activities align with the overall strategy and goals of the investors.

Relationships: Effective engagement relies on building and maintaining strong relationships with key stakeholders, including company executives, board members, and other investors. These relationships facilitate open communication and trust.

Skills and Knowledge: Having the appropriate skills and knowledge is crucial for understanding the issues at hand, asking the right questions, and providing valuable insights. This includes knowledge of ESG factors, industry-specific issues, and effective engagement techniques.


Reference:

MSCI ESG Ratings Methodology (2022) - Emphasizes the importance of leadership and skills in successful ESG engagement.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the factors contributing to effective engagement, highlighting the role of leadership and expertise.



The triple bottom line accounting theory considers people, profit, and:

  1. planet
  2. efficiency.
  3. licence to operate

Answer(s): A

Explanation:

The triple bottom line accounting theory considers people, profit, and planet. This framework expands the traditional financial bottom line to include social and environmental dimensions, emphasizing sustainable and responsible business practices.

People: This dimension focuses on the social aspects of business, including employee welfare, community engagement, and human rights. It assesses the impact of business activities on stakeholders and society at large.

Profit: The profit dimension includes the traditional financial performance of the business. It measures the economic value generated by the company and its contribution to shareholders and the economy.

Planet: The planet dimension addresses the environmental impact of business operations. It considers factors such as resource use, waste management, carbon emissions, and overall environmental sustainability.


Reference:

MSCI ESG Ratings Methodology (2022) - Explains the principles of the triple bottom line and its importance in comprehensive ESG assessment.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the integration of social, economic, and environmental factors in sustainable business practices.



Viewing page 3 of 102
Viewing questions 17 - 24 out of 802 questions



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

Sustainable-Investing Exam Discussions & Posts