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CFA Sustainable-Investing Exam
Sustainable Investing Certificate(CFA-SIC) (Page 59 )

Updated On: 11-Jan-2026
Page 20 of 102
PDF with 802 Questions

Asset owners can reflect ESG considerations through corporate engagement by:

  1. discussing ESG issues with an investee company's board.
  2. working with regulators to design a more stable financial system.
  3. using ESG criteria to identify investment opportunities through a thematic approach.

Answer(s): A

Explanation:

Asset owners can reflect ESG considerations through corporate engagement by discussing ESG issues with an investee company's board. This direct engagement allows asset owners to influence corporate behavior, encourage better ESG practices, and address specific ESG concerns that may impact long-term value creation. This approach is integral to active ownership and stewardship strategies.



Institutional investors achieve their stewardship and engagement objectives in practice through which of the following?

  1. Engaging directly with companies only
  2. Utilizing proxy voting advisory firms only
  3. Both engaging directly with companies and utilizing proxy voting advisory firms

Answer(s): C

Explanation:

Institutional investors achieve their stewardship and engagement objectives by both engaging directly with companies and utilizing proxy voting advisory firms. Direct engagement involves ongoing dialogue with company management and boards to influence corporate practices. Proxy voting advisory firms provide recommendations on voting matters at shareholder meetings, helping investors make informed decisions that align with their ESG priorities.



Which of the following ESG investment approaches is most likely applicable when investing in sovereign debt?

  1. ESG tilting
  2. Collaborative engagement
  3. Active private engagement

Answer(s): A

Explanation:

ESG tilting is an investment approach applicable when investing in sovereign debt. It involves adjusting the weightings of sovereign bonds in a portfolio based on ESG scores, thereby favoring countries with better ESG performance. This method aligns investment decisions with ESG criteria while maintaining diversification and managing risk within sovereign bond portfolios.



Stock exchanges can contribute to the growth of ESG market by:

  1. supporting companies to issue more ESG-oriented bonds.
  2. increasing the disclosure requirements on ESG data by listed companies.
  3. considering ESG factors when voting on behalf of shareholders at companies' annual general meetings.

Answer(s): B

Explanation:

Stock exchanges can contribute to the growth of the ESG market by increasing the disclosure requirements on ESG data by listed companies. Enhanced disclosure requirements ensure that investors have access to comprehensive and comparable ESG information, which is critical for making informed investment decisions. This promotes transparency and encourages companies to improve their ESG practices.



The Kyoto Protocol established emissions targets that are:

  1. binding on all countries.
  2. voluntary for all countries.
  3. binding only on developed countries.

Answer(s): C

Explanation:

Kyoto Protocol Emissions Targets:

The Kyoto Protocol is an international treaty that commits its Parties to reduce greenhouse gas emissions, based on the scientific consensus that global warming is occurring and that human-made CO2 emissions are driving it.

1. Binding Targets for Developed Countries: The Kyoto Protocol established legally binding emissions reduction targets specifically for developed countries, known as Annex I countries. These targets required these countries to reduce their collective greenhouse gas emissions by an average of 5.2% below 1990 levels during the first commitment period (2008-2012).

2. Differentiated Responsibilities: The principle of "common but differentiated responsibilities" underpins the Kyoto Protocol. This principle recognizes that developed countries have historically contributed the most to greenhouse gas emissions and thus have a greater responsibility to lead in emissions reduction efforts.

3. Voluntary Participation for Developing Countries: Developing countries, referred to as non-Annex I countries, were not subject to binding emissions reduction targets under the Kyoto Protocol. Their participation in emissions reduction efforts was voluntary, reflecting their lower historical contribution to global emissions and their need for economic development.

Reference from CFA ESG Investing:

Kyoto Protocol Overview: The CFA Institute explains that the Kyoto Protocol's binding targets apply only to developed countries, with the aim of addressing climate change through legally mandated emissions reductions.

Principle of Differentiated Responsibilities: This principle is highlighted in the CFA curriculum as a fundamental aspect of international climate agreements, ensuring that countries' responsibilities are aligned with their contributions to the problem and their capacity to address it.

In conclusion, the Kyoto Protocol established emissions targets that are binding only on developed countries, making option C the verified answer.



In contrast to engagement dialogues, monitoring dialogues most likely involve:

  1. a two-way sharing of perspectives.
  2. discussions intended to understand the company, its stakeholders and performance.
  3. conversations between investors and any level of the investee entity including non-executive directors.

Answer(s): B

Explanation:

In responsible investment, engagement dialogues and monitoring dialogues are two distinct approaches used by investors to interact with investee companies regarding ESG issues.

1. Engagement Dialogues: Engagement dialogues are proactive and involve a two-way sharing of perspectives between investors and the investee company. The objective is to influence and improve the company's ESG practices and performance. These dialogues often focus on specific ESG issues and seek to bring about change through constructive feedback and recommendations.

2. Monitoring Dialogues: Monitoring dialogues, on the other hand, are more about gathering information and understanding the company's operations, stakeholders, and overall performance. These dialogues are intended to provide investors with insights into how the company ismanaging ESG risks and opportunities. The focus is on ensuring that the company adheres to its stated ESG policies and commitments.

3. Nature of Monitoring Dialogues: Monitoring dialogues are typically more passive compared to engagement dialogues. They involve discussions that aim to understand the company's approach to ESG matters, its interactions with stakeholders, and its performance metrics. These conversations can occur at any level of the investee entity, including with non-executive directors, but are primarily focused on information gathering rather than influencing change.

Reference from CFA ESG Investing:

Engagement and Monitoring: The CFA Institute outlines the differences between engagement and monitoring dialogues, emphasizing that monitoring is primarily about understanding and assessing the company's ESG performance and stakeholder interactions.

Investor-Company Interactions: Understanding the nature of these interactions helps investors effectively manage their ESG integration strategies and ensures that they are well-informed about the investee company's practices.

In conclusion, monitoring dialogues most likely involve discussions intended to understand the company, its stakeholders, and performance, making option B the verified answer.



The correlation between ESG ratings of issuers by different ESG rating providers is:

  1. lower than the correlation between credit ratings of issuers by different credit rating providers.
  2. the same as the correlation between credit ratings of issuers by different credit rating providers.
  3. higher than the correlation between credit ratings of issuers by different credit rating providers.

Answer(s): A

Explanation:

The correlation between ESG ratings of issuers by different ESG rating providers tends to be lower compared to the correlation between credit ratings of issuers by different credit rating providers.

1. ESG Ratings Variability: ESG rating providers often use different methodologies, criteria, and weightings to assess companies' ESG performance. This can lead to significant variations in the ratings assigned to the same issuer by different ESG rating providers. Factors such as the choice of indicators, data sources, and the subjective nature of some ESG criteria contribute to these differences.

2. Credit Ratings Consistency: In contrast, credit rating providers like Moody's, S&P, and Fitch use more standardized and widely accepted methodologies to assess credit risk.
While there may still be some variation, the correlation between credit ratings from different providers is generally higher because they follow similar fundamental principles and financial metrics in their assessments.

3. Empirical Studies: Empirical studies have shown that the correlation between ESG ratings from different providers is lower compared to the correlation between credit ratings. This is due to the subjective and evolving nature of ESG criteria versus the more established and quantitative nature of credit risk assessment.

Reference from CFA ESG Investing:

ESG Ratings Methodologies: The CFA Institute discusses the differences in methodologies used by various ESG rating providers and the resulting variability in ratings. Understanding these differences is crucial for investors when interpreting and using ESG ratings.

Credit Rating Consistency: The CFA curriculum highlights the higher consistency and correlation between credit ratings from different providers, which is attributed to the standardized approaches used in credit risk assessment.



Scorecards for ESG analysis are most likely:

  1. applicable to public companies but not private companies.
  2. used when third-party research or scores are not available.
  3. inappropriate for country-level assessments of sovereign bonds.

Answer(s): B

Explanation:

ESG Analysis Scorecards:

Scorecards for ESG analysis are tools used by investors to evaluate and compare the ESG performance of companies, particularly when third-party research or scores are not available.

1. Applicability: Scorecards can be used for both public and private companies. They provide a structured framework for assessing ESG factors and can be tailored to the specific context and data availability of the companies being evaluated. Thus, they are not limited to public companies alone.

2. Purpose and Use: Scorecards are particularly useful when third-party ESG research or scores are unavailable. They enable investors to conduct their own ESG assessments based on the criteria and metrics they deem important. This is often the case for smaller companies, private companies, or in markets where ESG data coverage is limited.

3. Country-Level Assessments: Scorecards can also be adapted for country-level assessments of sovereign bonds, although this is less common. They can include criteria relevant to the ESG performance of countries, such as governance quality, environmental policies, and social indicators.

Reference from CFA ESG Investing:

ESG Scorecards: The CFA Institute highlights the use of ESG scorecards as a practical tool for investors to conduct their own assessments when external ESG ratings or research are not available. This enables a more tailored and flexible approach to ESG integration.

Applicability and Flexibility: The CFA curriculum discusses the versatility of scorecards in evaluating both corporate and sovereign issuers, underscoring their utility in various contexts.

In conclusion, scorecards for ESG analysis are most likely used when third-party research or scores are not available, making option B the verified answer.



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