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Free CFA® Sustainable-Investing Exam Questions (page: 9)

Page 9 of 102
PDF with 802 Questions

The Cadbury Commission proposed that:

  1. transparency around drivers of performance pay should be increased
  2. the Public Company Accounting Oversight Board should be established.
  3. every public company should have an audit committee meeting at least twice a year

Answer(s): C

Explanation:

The Cadbury Commission proposed that every public company should have an audit committee meeting at least twice a year.

Step-by-Step

Background of the Cadbury Commission:

The Cadbury Commission, established in the UK in 1991, aimed to address issues of corporate governance in the wake of several high-profile corporate scandals.

According to the CFA Institute, the commission's recommendations have had a lasting impact on corporate governance practices globally.

Key Recommendations:

One of the key recommendations of the Cadbury Commission was that every public company should establish an audit committee composed of independent non-executive directors. This committee should meet at least twice a year to review the company's financial reporting and internal controls.

The CFA Institute highlights that this recommendation was intended to enhance the oversight and accountability of financial reporting processes, reducing the risk of financial misstatements and fraud.

Importance of Audit Committees:

Audit committees play a critical role in ensuring the integrity of a company's financial statements. They provide an independent review of the financial reporting process, internal controls, and the external audit process.

The MSCI ESG Ratings Methodology emphasizes the importance of robust audit committee practices in maintaining investor confidence and protecting shareholder value.

Implementation and Global Influence:

The recommendations of the Cadbury Commission have been widely adopted and incorporated into corporate governance codes around the world. The requirement for regular audit committee meetings has become a standard practice in many jurisdictions.

The CFA Institute notes that effective audit committees are a cornerstone of good corporate governance, helping to ensure transparency, accountability, and the accuracy of financial reporting.


Reference:

CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals."

Historical documents and reports on the Cadbury Commission's recommendations and their impact on corporate governance.



Which of the three ESG factors is most often taken into consideration by traditional investment analysts?

  1. Social
  2. Governance
  3. Environmental

Answer(s): B

Explanation:

Traditional investment analysts most often take into consideration governance factors among the three ESG factors. Governance factors are typically viewed as critical to the operational and financial stability of a company.

Corporate Governance: Governance factors include the structures and processes for the direction and control of companies, such as board composition, executive compensation, audit practices, and shareholder rights. These elements are directly linked to a company's accountability and integrity.

Risk Management: Effective governance practices help mitigate risks related to fraud, mismanagement, and regulatory non-compliance. Analysts focus on governance to ensure that the company is managed in a way that protects shareholders' interests and enhances long-term value.

Performance Indicators: Strong governance is often correlated with better financial performance and reduced volatility. Companies with robust governance structures are perceived as more reliable and are thus more attractive to traditional investment analysts.


Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the importance of governance factors in traditional financial analysis and their impact on company performance.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the emphasis on governance factors by investment analysts due to their direct link to corporate stability and performance.



Which of the following factors is most relevant to the performance outlook of a military equipment manufacturer?

  1. Offshoring
  2. Gender equality
  3. Artificial intelligence

Answer(s): C

Explanation:

The factor most relevant to the performance outlook of a military equipment manufacturer is artificial intelligence (AI). AI plays a critical role in the defense sector, influencing product development, operational efficiency, and competitive advantage.

Technological Advancements: AI is pivotal in developing advanced military technologies such as autonomous vehicles, drones, surveillance systems, and cybersecurity solutions. These advancements can significantly impact the performance and growth prospects of a military equipment manufacturer.

Operational Efficiency: AI can enhance manufacturing processes, improve supply chain management, and optimize maintenance and logistics. These improvements can lead to cost savings and increased production capabilities.

Competitive Edge: Incorporating AI into military equipment provides a competitive edge by offering cutting-edge solutions that meet the evolving needs of defense customers. Staying ahead in technological innovation is crucial for maintaining market leadership and securing contracts.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the impact of technological factors, including AI, on the performance outlook of companies in various sectors, including defense.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the importance of AI in driving innovation and competitiveness in the defense industry.



Formal corporate governance codes are most likely to

  1. be found in all major world markets
  2. call for serious consequences for non-comphant organizations.
  3. be interpreted by proxy advisory firms when corporate compliance is assessed

Answer(s): A

Explanation:

Formal corporate governance codes are most likely to be found in all major world markets. These codes provide a framework for best practices in corporate governance and are widely adopted to enhance transparency, accountability, and investor confidence.

Global Adoption: Major markets around the world have established formal corporate governance codes to guide companies in implementing effective governance practices. These codes are often developed by regulatory bodies, stock exchanges, or industry associations.

Standardization of Practices: Corporate governance codes help standardize governance practices across markets, making it easier for investors to assess and compare companies. They cover key areas such as board composition, executive remuneration, and shareholder rights.

Regulatory Compliance: Compliance with governance codes is often mandatory or strongly encouraged, with companies required to disclose their adherence to these standards. This promotes consistency and enhances the integrity of the market.


Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the presence of formal corporate governance codes in major markets and their role in standardizing practices.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the global adoption of governance codes and their impact on corporate transparency and accountability.



The offering of indexes and passive funds with ESG integration by asset managers

  1. preceded the offering of actively managed ESG funds
  2. occurred at the same time as the offering of actively managed ESG funds.
  3. followed the offering of actively managed ESG funds

Answer(s): C

Explanation:

The offering of indexes and passive funds with ESG integration by asset managers followed the offering of actively managed ESG funds. Initially, ESG investing was primarily driven by active management strategies, with passive ESG funds emerging later as demand grew.

Initial Focus on Active Management: Early ESG investing efforts were concentrated in actively managed funds, where managers could apply detailed ESG analysis and make discretionary investment decisions based on ESG criteria.

Development of ESG Indexes: As ESG data and methodologies improved, index providers began creating ESG-focused indexes. This allowed for the development of passive investment products that track these indexes, offering investors broad ESG exposure.

Market Demand and Growth: The growing interest in ESG investing led to the expansion of passive ESG funds, providing a cost-effective way for investors to integrate ESG factors into their portfolios. These funds have since gained significant traction in the market.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the evolution of ESG investing and the initial focus on active management before the introduction of passive ESG funds.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the timeline of ESG fund offerings and the subsequent growth of passive ESG investment products.



Which of the following increases pressure on natural resources?

  1. Population growth
  2. Economic recession
  3. Declining life expectancy

Answer(s): A

Explanation:

Population growth increases pressure on natural resources. As the population grows, the demand for resources such as water, food, energy, and land intensifies, leading to greater exploitation and potential depletion of these resources.

Increased Demand: A growing population requires more resources to meet its needs. This includes more agricultural land for food production, more water for consumption and irrigation, and more energy for household and industrial use.

Resource Depletion: Higher demand for natural resources can lead to over-extraction and depletion. For example, excessive groundwater withdrawal can lead to aquifer depletion, while overfishing can deplete fish stocks.

Environmental Impact: Population growth can lead to environmental degradation, including deforestation, loss of biodiversity, and increased greenhouse gas emissions. The expansion of human activities often encroaches on natural habitats, leading to a decline in ecosystem health.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the impact of population growth on natural resource demand and environmental sustainability.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the pressures on natural resources due to increasing population and the associated environmental challenges.



Which of the following is an example of shareholder engagement? Institutional investors:

  1. responding to policy consultations
  2. making ESG recommendations to policy makers
  3. discussing ESG issues with an investee company's board

Answer(s): C

Explanation:

An example of shareholder engagement is institutional investors discussing ESG issues with an investee company's board. Shareholder engagement involves active dialogue between investors and company management to address and influence ESG practices and performance.

Direct Interaction: Engaging directly with the board allows institutional investors to communicate their ESG concerns and expectations. This can lead to more informed decision-making by the board on ESG matters.

Influence and Accountability: By discussing ESG issues with the board, investors can hold the company accountable for its ESG performance. This can drive improvements in areas such as governance, environmental impact, and social responsibility.

Long-term Value: Effective engagement on ESG issues can enhance long-term value creation for both the company and its shareholders. It encourages sustainable business practices that mitigate risks and capitalize on ESG opportunities.


Reference:

MSCI ESG Ratings Methodology (2022) - Highlights the role of shareholder engagement in influencing corporate ESG practices.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the importance of direct dialogue between investors and company boards in improving ESG performance.



Which of the following statements about quantitative ESG analysis is most accurate?

  1. Quantitative ESG analysis is only based on third-party data
  2. The length of the timeseries for ESG data is shorter than for financial data
  3. Application programming interfaces (APIs) are used to bring structure to the ESG dataset

Answer(s): B

Explanation:

The most accurate statement about quantitative ESG analysis is that the length of the timeseries for ESG data is shorter than for financial data. ESG data is relatively newer compared to traditional financial data, resulting in shorter historical datasets.

Historical Data: Financial data has been collected and reported for many decades, providing long timeseries that are essential for trend analysis and financial modeling. In contrast, comprehensive ESG reporting is a more recent development, leading to shorter timeseries.

Data Availability: The availability of ESG data has increased significantly in recent years as companies and regulators have placed greater emphasis on ESG disclosures. However, this data typically does not extend as far back as financial data.

Analysis Implications: Shorter timeseries for ESG data can limit the ability to perform long-term trend analysis and may impact the robustness of certain quantitative models. Analysts need to account for this limitation when incorporating ESG factors into their analyses.


Reference:

MSCI ESG Ratings Methodology (2022) - Discusses the challenges of shorter timeseries in ESG data compared to financial data.

ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the relatively recent focus on ESG data collection and its implications for analysis.



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